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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended May 31, 1998 Commission File No. 0-19860
SCHOLASTIC CORPORATION
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(Exact name of Registrant as specified in its charter)
DELAWARE 13-3385513
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
555 BROADWAY, NEW YORK, NEW YORK 10012
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 343-6100
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Securities Registered Pursuant to Section 12(b) of the Act:
NONE
Securities Registered Pursuant to Section 12(g) of the Act:
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TITLE OF CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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Common Stock, $.01 par value The NASDAQ Stock Market
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No _
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
The aggregate market value of the Common Stock, par value $0.01, held by
non-affiliates as of August 6, 1998, was approximately $562,880,733. As of such
date, non-affiliates held no shares of the Class A Stock, par value $0.01. There
is no active market for the Class A Stock.
The number of shares outstanding of each class of the Registrant's voting stock
as of August 6, 1998 was as follows: 15,460,571 shares of Common Stock and
828,100 shares of Class A Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates certain information by reference from the Registrant's
definitive proxy statement for the Annual Meeting of Stockholders to be held
September 16, 1998.
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PART I
ITEM 1 - BUSINESS
Scholastic Corporation (together with its subsidiaries, "Scholastic" or the
"Company") is a global children's publishing and media company producing and
distributing material for children, teachers and parents. Scholastic is among
the leading publishers and distributors of children's books, classroom and
professional magazines and other educational materials, with operations in the
United States, the United Kingdom, Canada, Australia, New Zealand, Mexico, Hong
Kong and India. Scholastic distributes most of its products directly to children
and teachers in elementary and secondary schools. During its seventy-eight years
of serving schools, Scholastic has developed strong name recognition associated
with quality and dedication to learning, has achieved a leading market position
in the school-based distribution of children's books and magazines and has
developed the leading internet-based subscription service for schools. The
Company has also used its proven system to develop successful children's books
and then build these brands into multimedia assets.
The Company's domestic book publishing business consists primarily of the
publication and distribution of children's books in paperback editions through
school book clubs, school book fairs, retail stores and classroom and library
sales. The Company believes that it operates the largest school book club
program and the largest school book fair business in the United States. In
fiscal 1998, Scholastic sold in excess of 250 million children's books in the
United States. The Company's sales of core and supplemental instructional
materials are also included in domestic book publishing.
Scholastic's domestic magazine publishing business consists primarily of the
publication of classroom magazines distributed to children in school and
professional magazines directed to teachers and other education professionals.
In fiscal 1998, the United States circulation of the Company's classroom
magazines was 7.5 million.
The Company's domestic operations also include the production and distribution
of educational computer software, the production and distribution of children's
video and television programming and the merchandising and licensing of
successful branded properties.
The Company's international business consists of seven operating subsidiaries,
four of which publish and distribute children's books, magazines, supplementary
text products and educational software and three of which primarily distribute
through schools children's books published by Scholastic as well as other
publishers. For the year ended May 31, 1998, approximately 90% of the Company's
international revenues were derived from the sale of children's books. The
Company believes that it operates the largest school book club program and the
largest school book fair business in the United Kingdom, Canada, Australia and
New Zealand.
Most of the Company's revenues are generated by targeted direct mail programs to
schools and by telephone sales representatives. Additionally, the Company has a
sales force of full-time and part-time representatives calling on schools to
sell its core curriculum materials, supplementary texts, educational software,
magazines and library book programs. For trade distribution, the Company has a
retail sales force calling on bookstores and other retail outlets that include
the sale of children's books.
The Company's Education Group manages the development and distribution of
substantially all Scholastic's school material designed for curriculum use and
paid for with school funds. The Education Group encompasses the Company's core
and supplemental publishing, classroom and professional magazines, early
childhood and professional books, as well as the Company's sales of
supplementary materials to classrooms and libraries. The Education Group also
manages the development and distribution of educational software and the
Scholastic Network(TM), the Company's Internet-based subscription service for
schools.
The following table sets forth revenues by product line for the five fiscal
years ended May 31:
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(AMOUNTS IN MILLIONS)
1998 1997 1996 1995 1994
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Domestic
Book publishing $ 728.5 $645.9 $657.5 $516.8 $428.3
Magazine
publishing 75.2 81.3 81.6 84.0 73.0
Media, TV/movie
productions &
licensing 58.8 60.2 39.8 19.5 18.0
International 195.9 178.9 149.7 129.6 112.3
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Total $1,058.4 $966.3 $928.6 $749.9 $631.6
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Scholastic's revenues have grown at an average annual compounded rate of
approximately 14% from fiscal 1994 through fiscal 1998.
Scholastic Corporation was incorporated under the laws of Delaware in 1986 and
through its subsidiaries and predecessor entities has been in business since
1920. The Company is engaged in one segment of business - the production,
publication and sale of educational materials.
ANNUAL REPORT 1997/1998|1
DOMESTIC BOOK PUBLISHING
(68% OF REVENUES)
The Company's domestic book publishing operations include children's book
publishing and instructional book publishing.
CHILDREN'S BOOK PUBLISHING
The Company has published books since 1948 and is one of the largest English
language publishers of children's books. The majority of children's books sold
by the Company are distributed in the United States directly to children and
teachers through its school-based book clubs and book fairs. The Company has
created and maintained a long-standing franchise in the educational market and
is also one of the leading sellers of children's books through the trade
channel.
The Company offers a broad range of quality children's literature. Many of the
books offered by the Company have received awards for excellence in children's
literature, including the Caldecott and the Newbery awards.
The Company obtains titles for sale in its distribution channels from three
principal sources. First, the Company publishes paperback and/or hardcover
editions of books written by outside authors under exclusive publication
agreements with the Company. Scholastic generally contracts for the rights to
sell these original titles in all channels of distribution including school and
trade. The second source consists of paperback reprints of books originally
published by other publishers for which the Company acquires rights under
license agreements to sell exclusively in the school market. The third source
for titles is from the Company's purchase of finished books from other
publishers to be sold in the school market. The Company currently maintains a
backlist (a list of titles published as new titles in prior years) of over 5,000
titles.
All of the Company's books are manufactured by outside printers. The printers
are generally selected on the basis of competitive bidding, and the Company,
when it deems it to be appropriate, enters into multi-year agreements which
guarantee printers a certain percentage of Scholastic volume in exchange for
favorable pricing terms. Scholastic purchases its paper from paper
manufacturers, wholesalers, distributors and printers.
The Company distributes its children's books principally through four
distribution channels: school book clubs, school book fairs, sales to classrooms
and libraries and retail book stores. In the school market, the Company
distributes books directly to teachers and students through school book clubs
(including continuity programs) and school book fairs. The Company also
distributes books to the school market through sales to classrooms and
libraries, principally through its Education Group. The fourth distribution
channel is sales to the trade market. By utilizing these distribution channels
and distributing its products internationally, the Company's volumes permit it
to realize economies in book production and distribution. The Company believes
its multiple distribution channels and volume help attract top quality authors,
editors and illustrators and publishers seeking widespread distribution in both
the specialized school market and the trade market, as well as publishers
seeking widespread distribution in the school market.
The Company's subsidiary, Lectorum Publications, Inc., acquired in 1996, is the
largest distributor in the U.S. of Spanish language books to schools and
libraries.
BOOK CLUBS
The Company operates ten school based book clubs: FIREFLY(R), serving
pre-kindergarten and kindergarten students; SEESAW(R), serving kindergarten and
first grade students; two CARNIVAL(R) clubs, one serving students in
kindergarten through second grade and the other serving third through sixth
grade students; LUCKY BOOK CLUB(R), serving second and third grade students;
ARROW BOOK CLUB(R), serving fourth through sixth grade students; TAB BOOK
CLUB(R), serving sixth, seventh, and eighth grade students; and three
Trumpet(TM) clubs, which were acquired from Bantam Doubleday Dell in 1996 and
together serve pre-K through sixth grade students. In addition, the Company
creates special theme-based offers targeted to the different grade levels during
the year, such as holiday offers, science offers, curriculum offers, Spanish
offers, etc. The Company also operates FUN-TASTIC-AT-HOME!(TM), THE BABY-SITTERS
COLLECTOR CLUB, THE BABY-SITTERS LITTLE SISTER FRIENDSHIP CLUB, THRILLS &
CHILLS(TM), CLIFFORD'S CLUBHOUSE, HELLO READER, BOX CAR, THE MAGIC SCHOOL BUS,
ARTHUR'S ADVENTURE, FRANKLIN & FRIENDS, STAR WARS MISSIONS, ANIMAL LOVERS and
GOOSEBUMPS COLLECTORS CLUB, which are book club continuity programs promoted
primarily through schools and which deliver paperback books to children at home
and bill parents at home.
From fiscal 1994 through fiscal 1998, domestic book club revenues grew primarily
as a result of the expansion of book club continuity programs, volume increases
in the Company's school-based book clubs, increases in special book club offers,
price increases, the selection by children of higher priced items and the
acquisition of the Trumpet book clubs.
The Company founded its first book club in 1948 and believes that it currently
operates the largest school book club program in the United States. The Company
estimates that over 80% of all elementary school teachers in the United States
participate in book clubs, with approximately 75% of these teachers using
Scholastic book clubs at least once during the year.
2|SCHOLASTIC CORPORATION
The Company believes that teachers participate in school book clubs because they
feel that quality books at affordable prices will be of interest to students and
improve students' reading skills. The Company also believes teachers are
attracted because the book clubs offer easy access to a broad range of books.
The Company mails promotional pieces containing order forms to teachers in the
vast majority of the pre-K through eighth-grade classrooms in the United States
on a monthly basis throughout the school year. Participation in any month does
not create an obligation to participate in any subsequent month, nor does it
preclude participation in a competitor's book club.
Teachers who wish to participate in a book club distribute the order forms to
their students, who may choose from generally fifty or more selections at
substantial reductions from retail prices. The teacher consolidates the
students' orders and payments, and mails or phones orders to the Company, which
then delivers the books to the teacher for distribution to the students.
Teachers who participate in the book clubs receive bonus points, which may be
redeemed for the purchase of additional books and other items for use in their
classrooms.
The sources of books for the Company's school book clubs are original
publications, reprints licensed from other publishers for school distribution
and finished books purchased from other publishers.
The Company processes and fulfills orders for its book clubs, as well as for its
other school sales (except book fairs and continuity programs) and trade
distribution, from its primary warehouse and distribution facility in Jefferson
City, Missouri. Orders for the book clubs are generally delivered to customers
within 7-10 days from receipt of the teacher's order.
In its book club business, the Company competes on the basis of book selection,
price, promotion and customer service. The Company believes that its broad
selection of titles, many of which are distributed in this channel exclusively
by Scholastic, combined with low unit manufacturing costs and its large number
of promotion mailings, enable the Company to compete effectively.
BOOK FAIRS
The Company believes it operates the largest school book fair business in the
United States. The Company entered the book fair business in 1981. Since that
time, the Company's book fair business has grown primarily through geographic
expansion, selected acquisitions, increased penetration of its existing markets
and growth in revenue on a per fair basis. In June 1998, the Company acquired
certain assets of Pages Book Fairs, Inc., for $10.5 million, including
inventory, book fair cases and customer lists.
The Company operates book fairs in all 50 states under the name SCHOLASTIC BOOK
FAIRS(R). The Company offers premium fairs under the names SCHOLASTIC LITERACY
FESTIVAL(TM) and SCHOLASTIC BOOKS ON TOUR(R), which feature an expanded list of
titles supported by exciting merchandise displays and book character costumes
designed to create a dynamic Book Fair event open to the entire family. The
Company also markets fairs under the names CLASSIC BOOK FAIRS(TM) and READ
STREET(R). In January 1998, the Company tested and launched, on a limited basis,
its DISCOVERY FAIR(TM). This new fair features non-fiction, science, technology,
arts, crafts and interactive products.
Book fairs are generally week-long events conducted on school premises and
sponsored by school librarians and/or parent-teacher organizations. Book fair
events expose children to hundreds of new books and allow children the
opportunity to purchase books and other select products of their choice.
Although the Company provides the school with the books and book display cases,
the school actually conducts the book fair. The Company believes that the
primary motivation of the schools in sponsoring fairs is to provide their
students with quality books at reasonable prices in order to help them become
more interested in reading. In addition, the school retains a portion of the
book fair revenues that can be used to purchase books, supplies and equipment
for the school.
The Company operates its book fairs in the United States on a regional basis
through over 20 sales offices and over 70 warehouse locations. The marketing of
book fairs is performed from the sales offices by telephone sales and field
representatives. The Company's books and display cases are delivered to schools
from the Company's warehouses by a fleet of leased vehicles. The Company's
customer service function is performed from the regional and branch offices,
supported by field representatives. The sources of books for the Company's book
fairs are finished books purchased from other publishers, reprints licensed from
other publishers for school distribution and original Scholastic publications.
The Company believes that its competitive advantages in the book fair business
include the strength of the relationship between its sales representatives and
schools, broad geographic coverage, a high level of customer service and its
breadth of product selection. Approximately 90% of the schools that sponsored a
Scholastic book fair in fiscal year 1997 sponsored a Scholastic book fair again
in fiscal 1998.
TRADE
The Company distributes its original publications through the trade
distribution channel. Almost all of the titles distributed to the trade market
are also offered in the Company's school book clubs and book fairs. In the
Company's publishing
ANNUAL REPORT 1997/1998|3
program, over 2,500 titles are maintained for trade distribution, including the
branded series ANIMORPHS(R), GOOSEBUMPS(R), THE BABY-SITTERS CLUB(R), THE MAGIC
SCHOOL BUS(R), DEAR AMERICA(R) and CLIFFORD THE BIG RED DOG(R).
The Company has a trade field sales organization which focuses on selling the
broad range of Scholastic books to book store accounts. The Company outsources
invoicing, billing, returns processing and collection services in connection
with trade distribution.
The Company's sales in the trade market are led by ANIMORPHS, which was first
published in 1996 and as of July 1998 had 22 titles and 15 million copies in
print, the GOOSEBUMPS series, with 141 titles and 210 million copies in print
and THE BABY-SITTERS CLUB series, with 309 titles and 170 million copies in
print. Two other Scholastic-developed properties that also generate significant
sales are THE MAGIC SCHOOL BUS series with 46 titles and 35 million copies in
print and the new DEAR AMERICA hardcover series with nine titles and three
million copies in print. The SCHOLASTIC CHILDREN'S DICTIONARY, published in 1996
and with over 1.5 million copies in print, has greatly enhanced the Company's
reference line.
During fiscal 1998, Scholastic-published books received numerous awards,
including the prestigious Newbery Medal for Karen Hesse's OUT OF THE DUST and
the selection for OPRAH'S BOOK CLUB(R) of three titles written by Bill Cosby
from the newly published LITTLE BILL(TM) series. THE BLUE SKY PRESS(R) and
Scholastic Press imprints have attracted some of the most well-known talents in
children's publishing, including Leo and Diane Dillon, Virginia Hamilton, David
Kirk, Christopher Myers, Walter Dean Myers, Dav Pilkey, Cynthia Rylant, David
Shannon, Mark Teague, Rachel Vail and Walter Wick.
CLASSROOM AND LIBRARY SALES
Many elementary school teachers use paperback books in conjunction with basal
textbooks to teach reading and other subjects. In addition to offering book
clubs and book fairs, Scholastic serves this need by offering individual titles
and collections of paperback books for classrooms and school libraries,
primarily through the Education Group's sales force. The majority of the titles
sold directly to school classrooms and libraries by the Education Group are the
same as those offered through the Company's book clubs and book fairs.
Purchases of individual titles and book collections are generally funded by
school budgets. Classrooms and libraries may order directly through catalogs
mailed to the schools and through the Company's Education Group sales force.
CORE AND SUPPLEMENTAL PUBLISHING
The Education Group's core and supplemental publishing operations develop and
distribute instructional materials (both supplemental and core curriculum
programs) directly to schools. Based on industry research, the Company believes
that the kindergarten through sixth grade ("K-6") market for instructional
materials, in the areas of language arts and science, is in excess of one
billion dollars annually.
Publishing for the K-6 market is being affected by a number of factors which
include the shift toward skill-based instruction balanced with the philosophy of
literature-based instruction (the teaching of reading and other subjects
utilizing whole books such as trade or paperback books). State and local
governments are providing significant increases in funding to improve students'
test scores and to provide a means to assess and support pupil development. In
addition, measures to decrease class size have begun to take place in large
urban areas, particularly California, thus increasing overall instructional
material spending.
The Company believes that these changes provide an opportunity to substantially
expand its presence in the instructional materials market. To capitalize on this
opportunity, the Company's strategies are the following: focus its publishing in
language arts and science where the Company has successful book and magazine
publishing programs; publish multimedia programs which provide schools with
innovative alternatives to programs offered by other publishers; concentrate its
publishing in the K-6 grade market, which is the largest part of the market; use
existing books and magazines from other Scholastic publishing groups; and
cross-market its new programs to the more than one million teachers who
currently participate in Scholastic's book clubs and use its magazines.
Pursuant to this strategy in the core area, the Company publishes and
distributes SCHOLASTIC LITERACY PLACE(R), its K-6 market reading program, and
SCHOLASTIC SOLARES(TM), its Spanish elementary reading program. During fiscal
1998, the Company significantly increased the number of school districts which
adopted SCHOLASTIC LITERACY PLACE and has had strong follow-up orders from
schools which have already adopted the program. In addition to the core
programs, the company continues to publish innovative supplemental material such
as the non-fiction emergent readers used in the SCIENCE RESOURCE CENTER for
pre-K and kindergarten classrooms.
The Company continues to distribute its successful line of phonics products. The
Company is publishing additional chapter books and Spanish phonics materials to
meet growing demand.
4|SCHOLASTIC CORPORATION
In fiscal 1997, the Company introduced network versions of WIGGLEWORKS(R), its
standard-setting CD-ROM-based beginning literacy program. Demand remains strong
for this popular technology.
In April 1998, the Company acquired The Electronic Bookshelf, a technology-based
reading management and assessment system designed for use in schools.
MAGAZINE PUBLISHING
(7% OF REVENUES)
GENERAL
Scholastic has been for many years a leading publisher of classroom magazines,
which are used as supplementary educational materials, and professional
magazines, directed at teachers and education professionals. Most of the
Company's classroom and professional magazines carry the Scholastic name, which
reinforces the Company's widely recognized educational reputation with students,
teachers and school administrators. The Company's reputation for publishing
quality magazines, maintaining an extensive magazine mailing list and having a
large customer base of teachers help generate customers for its book clubs and
other Scholastic products as well as its magazines. At the same time, the
Company uses its book club mailings to help secure additional circulation for
its classroom and professional magazines
CLASSROOM MAGAZINES
The Company's 35 classroom magazines are designed to encourage students to read
and to supplement the formal learning program by bringing subjects of current
interest into the classroom. The subjects covered include English, reading,
literature, math, science, current events, social studies and foreign languages.
The most well known of the Company's domestic magazines are SCHOLASTIC NEWS(R)
and JUNIOR SCHOLASTIC(R).
The Company's classroom magazine circulation in the United States in each of
fiscal 1998 and 1997 was 7.5 million. Approximately two-thirds of the
circulation is in K-6, with the balance in grades seven through twelve. In
fiscal 1998, teachers in approximately 60% of the elementary schools and 70% of
the high schools in the United States used the Company's classroom magazines.
The various classroom magazines are distributed on a weekly, bi-weekly and
monthly basis during the school year. The majority of circulation revenue is
paid for by the schools and the remainder by students. Circulation revenue
accounted for approximately two-thirds of the Company's classroom magazine
revenues in fiscal 1998. Several of the magazines distributed in secondary
schools carry advertising.
The Education Group markets the Company's classroom magazines largely by direct
mail and telephone sales representatives and field sales representatives. The
Company maintains an extensive database of teachers and schools which it
utilizes for promotional efforts.
Additionally, the Company develops and distributes customized marketing programs
sponsored by major corporations, government agencies and other organizations
which want to reach young people and educators. Customized programs may include
single-sponsor magazines, posters, teaching guides, integrated teaching kits,
educational videos and other promotional media and are developed principally for
Fortune 500 corporations and governmental agencies.
PROFESSIONAL PUBLISHING AND EARLY CHILDHOOD PUBLISHING
The Company publishes three magazines directed at teachers and education
professionals: INSTRUCTOR, SCHOLASTIC EARLY CHILDHOOD TODAY(TM) and COACH and
ATHLETIC DIRECTOR(TM). Total circulation for these magazines in fiscal 1998 was
approximately 300,000. The magazines are distributed throughout the academic
year. Subscriptions are solicited by direct mail and are cross-marketed to
teachers through the book clubs. The Company also publishes SCHOLASTIC PARENT
and CHILD(R) magazine, which is directed at parents and distributed through
schools and day care programs. SCHOLASTIC PARENT AND CHILD'S circulation is
approximately 1.3 million. The magazines carry outside advertising, advertising
for the Company's other products and advertising for clients that sponsor
customized programs. In fiscal 1998, advertising revenue represented the
majority of the professional publishing and early childhood magazine revenues.
The professional publishing division also publishes professional books and
continuity programs consisting of instructional materials designed for and
generally purchased by teachers. Professional books are marketed through
Scholastic book clubs, catalogs, direct mail solicitations and by the Company's
trade sales force to teacher stores and book stores. The early childhood
division also publishes children's books and a pre-kindergarten and kindergarten
curriculum program, the SCHOLASTIC EARLY CHILDHOOD WORKSHOP(TM). Revenues from
these items are included in domestic book publishing revenues.
SCHOLASTIC SOHO GROUP
Effective January 1, 1998, the Company sold its SOHO Group, including the
magazines HOME OFFICE COMPUTING(R) and SMALL BUSINESS COMPUTING(TM), based on a
determination that the SOHO Group was not a core asset.
ANNUAL REPORT 1997/1998|5
MEDIA, TV/MOVIE PRODUCTIONS
& LICENSING
(6% OF REVENUES)
TV/MOVIE PRODUCTIONS & LICENSING
Scholastic Entertainment Inc. ("SEI", formerly Scholastic Productions, Inc.), a
wholly-owned subsidiary of the Company, extends the Company's franchises by
creating and managing global brands based on Scholastic's strong publishing
properties. SEI's multimedia programming provides the catalyst for branding and
consumer products activities worldwide.
FILMED ENTERTAINMENT
SEI has an extensive list of programs on air, in production or in development
including:
SCHOLASTIC'S THE MAGIC SCHOOL BUS
In fiscal 1998, SEI completed production of thirteen episodes of the popular
animated children's TV series SCHOLASTIC'S THE MAGIC SCHOOL BUS(R) ("The Magic
School Bus"), bringing the total library to fifty-two episodes. The series has
been airing its fourth and final season on PBS during the 1997/98 broadcast
year. The Magic School Bus, which has won numerous awards including an Emmy for
Lily Tomlin, has been the most popular series for school-aged children on PBS.
In the fall of 1998, The Magic School Bus will move from PBS and begin airing on
the Fox Kid's Network ("FKN") for a two year period. In addition, the series has
been licensed for television in over 40 international territories by Nelvana
Ltd. The series may also be found worldwide on home video; WarnerVision
Entertainment has successfully released a total of 18 episodes domestically and
in Canada while in other countries the videos are being distributed primarily by
Twentieth Century Fox Home Entertainment ("FHE").
GOOSEBUMPS
During fiscal 1998, SEI continued to produce the Goosebumps(R) TV series for FKN
with the completion of the third season order of 24 half hour episodes. FKN has
ordered an additional eight episodes for the fourth season of the series which
commences in the fall of 1998. This will bring the total number of episodes to
62 and the total number of one hour specials to six. The series will continue to
be aired on Saturday mornings where it is currently FKN's number one show.
GOOSEBUMPS has been one of the top-rated children's series on television since
its debut in 1995. Also during fiscal 1998, Saban International, the
international TV distributor of GOOSEBUMPS on behalf of Fox Kid's Worldwide,
continued to license the series; it is currently airing in most major
territories and has been sold in over 100 countries worldwide. The series has
been especially popular in the United Kingdom where it has been the number one
rated children's series. GOOSEBUMPS(R) has been released by FHE on video in most
major international territories.
In addition, FHE has released GOOSEBUMPS videos domestically, including three
releases during fiscal 1998. GOOSEBUMPS and SEI received the 1997 VSDA (Video
Software Dealers Association) Award for "Best Children's Video Line of the
Year."
ANIMORPHS
SEI commenced production in spring 1998 of twenty half-hour live action episodes
of ANIMORPHS(TM), based on Scholastic's best-selling book series. The series
will premiere in September 1998 in a prime-time slot on the popular children's
basic cable television channel, Nickelodeon. Nickelodeon has licensed the U.S.
and international (excluding Canadian) TV rights for its own channels; Columbia
TriStar Home Video has licensed the domestic home video distribution rights. SEI
has licensed ANIMORPHS for a fall 1998 premiere in Canada to both YTV (a basic
cable channel) and the Global Television Network (broadcast market). Nickelodeon
will also distribute the series in television markets outside of North America.
DEAR AMERICA
SEI has received an order from Home Box Office ("HBO") for six half hour
episodes based on Scholastic's popular and critically acclaimed book series DEAR
AMERICA(TM). Filming commenced during summer 1998 and the series is expected to
premiere in the first half of 1999.
OTHER DEVELOPMENT
Another major Scholastic franchise in development for exploitation across
multiple media platforms is an animated TV series based on the beloved book
series, SCHOLASTIC'S CLIFFORD THE BIG RED DOG(TM). SEI also has other original
children's and family oriented projects in development.
MARKETING AND CONSUMER PRODUCTS
Scholastic Consumer Products, a division of SEI, develops licensing and
promotional programs, primarily for brands produced in other media. In June
1997, SEI was awarded the 1997 LIMA (Licensing Industry Merchandiser's
Association) award for "Licensing Agency of the Year." Examples of SEI's
licensing and promotional achievements include:
SCHOLASTIC'S THE MAGIC SCHOOL BUS
o The award-winning series of CD-ROMs, co-produced with Microsoft. All of The
Magic School Bus(TM) CD-ROMs are in the all-time top 20 best-selling titles
for children.
o Scholastic's Traveling Magic School Bus, a recreation of the bus from the
book and animated series, which through
6|SCHOLASTIC CORPORATION
December 1997 had visited over 250 schools, libraries, retail stores and book
fairs in the U.S. and Canada, reaching over 1 million fans.
o Consumer promotion partnerships with Howard Johnson and Colgate Palmolive,
along with a live stage show.
GOOSEBUMPS
o The 1997 LIMA award "License of the Year" for GOOSEBUMPS.
o Two CD-ROMs, co-produced with Dreamworks SKG, the first of which reached
number one on the children's best seller list.
o The 1996 Reggie Award-winning GOOSEBUMPS Halloween Promotion with Pepsi,
Frito-Lay, Hershey, Taco Bell and Target retail stores.
ANIMORPHS
o A multi-faceted licensing and marketing campaign for Animorphs to launch
domestically in conjunction with the TV series in fall 1998.
o Licensing partnerships with 15 industry leaders, including Hallmark, Antioch,
Giant and Hasbro Toys.
o A multi-year consumer promotion agreement with Tricon (corporate parent of
Taco Bell, KFC and Pizza Hut) for a consumer promotion in the fourth calendar
quarter of 1998.
SPECIAL MARKETS
SEI's subsidiary, SE Distribution Inc., creates, manufactures and distributes
high-quality consumer products primarily based on Scholastic's literary
properties. In fiscal 1997, the first product line of upscale plush toys,
SIDEKICKS(TM), was launched with items based on CLIFFORD THE BIG RED DOG and
CLIFFORD THE SMALL RED PUPPY(R). During fiscal 1998, additional products were
introduced to the marketplace based on the Magic School Bus character Liz. The
products are available through independent toy/gift stores, specialty chains,
department stores, mail order catalogs and book stores as well as through
Scholastic's proprietary channels (i.e. book clubs and book fairs). A second
product line of stationery items, PAPER SCISSORS ROCK(TM), will be launched in
Spring 1999.
During fiscal 1998, SEI also managed the sale of books through non-traditional
channels. These revenues are included in domestic book publishing revenues.
TECHNOLOGY AND NEW MEDIA
The mission of the Technology and New Media group is threefold: publish and sell
educational software and multimedia products to schools and homes; support other
Scholastic divisions' technology efforts (including the creation of technology
components integrated into Scholastic's core curriculum materials); and explore
and develop opportunities in interactive networks, including the SCHOLASTIC
NETWORK(TM), which is a subscription-based service available to educators via
the Internet, as well as Internet-based applications for delivery of Scholastic
products and services.
Since 1982, the Company has published educational software which is sold to
schools by the Education Group's sales representatives, catalogs and educational
distributors serving the school market. The Company also sells consumer software
through book clubs and book fairs, and since 1991, has also sold software
through a classroom software club modeled on its classroom book clubs. In fiscal
1998, the Company launched a new software club aimed at the early learning
market. The Company acquires software for distribution in all of these channels
through a combination of licensing, internal development, contracting with
independent software developers and third-party distribution arrangements.
In fiscal 1994, the Company launched the Scholastic Network, the first online
service developed especially for educators and students, which moved to the
Internet in fiscal 1997. It offers teachers supporting material and compelling
in-class experiences for the kindergarten through eighth grade market. It is the
largest teacher-oriented subscription service on the Internet. In addition, the
Company has operated its home page on the World Wide Web since 1994. This site,
Scholastic.com, provides an overview of the Company's activities, resource
libraries for educators, an education store and special programming tied to
SCHOLASTIC NETWORK'S content. The SCHOLASTIC NETWORK is featured on
Scholastic.com and is a paid service. The Scholastic Network has generated a
loss since its launch in fiscal 1994.
In fiscal 1998, the Company initiated sales of its internally developed CD-ROM
titles in the retail channel through a third party distribution arrangement.
This distribution will complement sales through the Company's book clubs,
software clubs and school fairs.
The Company also produces and markets videos to the school market through Weston
Woods, a producer of videos based on high quality children's books, which was
acquired in 1996.
ANNUAL REPORT 1997/1998|7
INTERNATIONAL
(19% OF REVENUES)
Scholastic operates wholly-owned subsidiaries in the United Kingdom, Canada,
Australia, New Zealand, Mexico, India and Hong Kong. The businesses in the
United Kingdom, Canada, Australia and New Zealand generally mirror the Company's
business in the United States and include publishing and/or distributing
children's books, magazines, school text materials and educational software. The
Company's businesses in Mexico, India and Hong Kong principally distribute
through schools books published by Scholastic and other publishers. Products
from the United States appropriate to each specific market are distributed where
rights are available.
Scholastic's International division also oversees the licensing of
foreign-language rights in eligible Scholastic titles to other publishing
companies around the world. The GOOSEBUMPS(TM) series, for example, has been
licensed to more than 15 publishers in 15 languages. Similar success is building
with ANIMORPHS(TM), another bestseller in the United States. Scholastic titles
have been licensed in over 25 languages from Arabic to Zulu.
In addition, Scholastic operates an export department from its New York
headquarters. This group serves Department of Defense Education Activity
("DoDEA") schools abroad, international schools, American schools, indigenous
schools and schools within possessions and territories of the United States. The
group also focuses on wholesale and retail distributors in regions not otherwise
serviced by Scholastic. SCHOLASTIC LITERACY PLACE(R) has been adopted by DoDEA
for 123 schools.
Scholastic U.K., founded in 1964, is Scholastic's largest international
subsidiary, with fiscal 1998 revenue of $90.9. It is the United Kingdom's
largest book club and book fair operator, based in part on the acquisition of
Red House Books Ltd. in 1997 and of School Book Fairs, Ltd. in 1996. Scholastic
U.K. also publishes five monthly magazines for teachers and a substantial list
of children's and educational books. Scholastic U.K.'s trade books appear
frequently in the U.K. children's best seller lists.
Scholastic Canada, founded in 1957, distributes both English and French language
products used in more than 80% of Canadian schools. It also is Canada's leading
operator of book clubs and book fairs and publishes original works for
distribution in Canada.
Scholastic Australia, founded in 1968, is the country's leading publisher and
distributor of children's educational materials in Australia. Its book clubs and
book fairs reach 90% of the country's primary schools. Local imprints include
Omnibus Books and Margaret Hamilton Books.
Scholastic New Zealand, founded in 1964, is the leading book distributor to
schools and the largest children's book publisher in New Zealand. It publishes
about 30 new titles each year and has won annual picture book and junior fiction
awards, including the Aim Children's Book Awards and the New Zealand Library and
Information Association Awards.
The Company also operates through subsidiaries in emerging marketplaces in
Mexico, India and Hong Kong. These businesses distribute books in both English
and local languages principally through school book fairs and school book clubs.
SEASONALITY
The Company's book clubs, book fairs and most of its magazines operate on a
school-year basis, therefore, the Company's business is highly seasonal. As a
consequence, the Company's revenues in the first and third quarters of the
fiscal year are lower than its revenues in the other two fiscal quarters, and
the Company experiences a substantial loss from operations in the first quarter.
Typically, book club and book fair revenues are proportionately larger in the
second quarter of the fiscal year, while revenues from the sale of instructional
materials are larger in the first quarter. See Supplementary Financial
Information in Item 8.
For the June through September time period, the Company experiences negative
cash flow due to the seasonality of its business. Historically, as a result of
the Company's business cycle, seasonal borrowings have increased during June,
July and August and generally have peaked in September or October, and have been
at the lowest point in May.
COMPETITION
The market for educational materials is highly competitive. Competition is based
on the quality and range of educational materials made available, price,
promotion and customer service. In the United States and Canada, competitors
include one other national school book club operator and one other national
school book fair operator as well as smaller regional operators, including local
bookstores. Domestically and internationally, competitors include numerous other
paperback book, textbook and supplementary text publishers, distributors and
other resellers (including over the Internet) of children's books and other
educational materials, national publishers of classroom and professional
magazines with substantial circulation, numerous producers of television, video
and filmed programming (many of which are substantially larger than the
Company), publishers of
8|SCHOLASTIC CORPORATION
computer software and distributors of products and services on the Internet.
Competition may increase further to the extent that other entities enter the
market and to the extent that current competitors or new competitors develop and
introduce new educational materials that compete directly with the products
distributed by the Company or develop or expand competitive channels for the
sale of children's books or other educational materials.
EMPLOYEES
As of May 31, 1998, Scholastic employed approximately 4,500 persons in full-time
jobs and 320 in hourly or part-time jobs in the United States and approximately
1,770 persons in its international subsidiaries. The number of part-time
employees fluctuates during the year because the Company's business is closely
correlated with the school year. The Company believes that its relations with
employees are good.
COPYRIGHT AND TRADEMARKS
SCHOLASTIC is a registered trademark in the United States and in a number of
countries where the Company conducts business. Scholastic Inc., the Company's
principal U.S. operating subsidiary, has registered and/or has pending
applications to register its trademarks in the United States for the names of
each of its domestic book clubs, the titles of its magazines and the names of
all of its core curriculum programs. The Company's international subsidiaries
have also registered its trademarks in the name of the Scholastic Inc. for the
names of their respective books clubs and magazines. Although individual book
titles are not subject to trademark protection, Scholastic Inc. has registered
and/or has pending applications to register its trademarks in the United States
and in a number of countries for the names of certain series of books and
consumer products, such as THE BABY-SITTERS CLUB, THE MAGIC SCHOOL BUS and
ANIMORPHS.
All of the Company's publications, including books, magazines and software, are
subject to copyright protection. The Company consistently registers its
copyrights for its magazines and books in the name of the Company. The Company
vigorously defends and asserts its trademarks and copyrights claims in courts
and in trademark offices within and outside of the United States and, as
necessary, outside counsel may be retained.
ITEM 2 - PROPERTIES
The Company maintains its world headquarters in various locations in New York
City, New York, where it leases approximately 419,000 square feet of office
space for executive offices and certain of its operating divisions in seven
properties. The Company also owns or leases approximately 1.3 million square
feet of office and warehouse space for its primary distribution center located
in the Jefferson City, Missouri area.
The Company owns or leases approximately 1.5 million square feet of office and
warehouse space in over seventy facilities around the United States for
Scholastic Book Fairs.
The Company also owns or leases approximately 800,000 square feet of office and
warehouse space in nineteen facilities in Canada, the United Kingdom, Australia,
New Zealand and elsewhere around the world for its international businesses.
With respect to the Company's leased properties, no difficulties are anticipated
in negotiating renewals as leases expire or in finding other satisfactory space,
if current premises become unavailable. For further information concerning the
Company's obligations under its leases, see Note 4 of the Notes to Consolidated
Financial Statements. The Company considers its properties adequate for its
present needs.
ITEM 3 - LEGAL PROCEEDINGS
Three purported class action complaints were filed in the United States District
Court for the Southern District of New York against Scholastic Corporation and
certain officers seeking, among other remedies, damages resulting from
defendants' alleged violations of federal securities laws. The complaints have
now been consolidated. The Consolidated Amended Class Action Complaint (the
"Consolidated Complaint") was served and filed on August 13, 1997. The
Consolidated Complaint is styled as a class action, IN RE SCHOLASTIC SECURITIES
LITIGATION, 97 Civ. 2447 (JFK), on behalf of all persons who purchased Company
common stock from December 10, 1996 through February 20, 1997. The Consolidated
Complaint alleges, among other things, violations of Sections 10(b) and 20(a) of
the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, resulting from
purported materially false and misleading statements to the investing public
concerning the financial condition of the Company. Specifically, the
Consolidated Complaint alleges misstatements and omissions by the Company
pertaining to adverse sales and returns of its popular GOOSEBUMPS(R) book series
prior to the Company's interim earnings announcement on February 20, 1997. The
litigation is still in the preliminary stages. The Company has filed a motion to
dismiss the Consolidated Complaint and discovery has not yet begun. The Company
believes that the suit is without merit and intends to vigorously defend against
this action.
ANNUAL REPORT 1997/1998|9
Two subsidiaries of the Company are also defendants and counterclaim plaintiffs
in litigation with Parachute Press, Inc. ("Parachute"), the licensor of certain
publication and non-publication rights to the GOOSEBUMPS series. The action was
commenced by Parachute following repeated notices from the Company to Parachute
of material breaches by Parachute of the agreements under which such rights are
licensed and the exercise by the Company of its contractual remedies under the
agreements.
The action, Parachute Press, Inc. v. Scholastic Inc., Scholastic Productions,
Inc. and Scholastic Entertainment, Inc. (97 Cir. 8510 (JFK), was commenced on
November 14, 1997 in the United States District Court for the Southern District
of New York. Parachute amended its complaint on December 9, 1997 and on April 1,
1998.
In its amended complaint, Parachute alleges that the exercise of such remedies
was improper and seeks declaratory relief and unspecified damages for, among
other claims, alleged breaches of contract, copyright infringement and acts of
unfair competition. Damages sought by Parachute include the payment of a total
of approximately $36.1 million of advances over the term of the contract, of
which approximately $15.3 million had been paid at the time the litigation
began.
The Company seeks declaratory relief and damages for, among other claims,
breaches of contract and acts of unfair competition. Damages sought by the
Company include repayment by Parachute of a portion of the $15.3 million advance
already paid at the time the litigation began.
The litigation is still in the preliminary stages. The Company has filed a
motion to dismiss and discovery has begun in the matter. The Company believes
that Parachute's claims are without merit. The Company intends to vigorously
defend the lawsuit and pursue its counterclaims. The Company does not believe
that this dispute will have a material adverse effect on its financial
condition.
A number of lawsuits and administrative proceedings which have arisen in the
ordinary course of business are pending or threatened against the Company. The
Company believes there are meritorious defenses to substantially all such
claims. From time to time the Company is also involved in proceedings with
states with respect to sales and use taxes, for which the Company believes it is
adequately reserved.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year covered by this report, no matter
was submitted to a vote of security holders, through the solicitation of proxies
or otherwise.
PART II
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq National Market system under
the symbol SCHL. The Class A Stock is convertible into Common Stock on a
share-for-share basis. There is no active market for the Class A Stock. The
table below sets forth, for the periods indicated, the quarterly and one year
high and low selling prices on the Nasdaq National Market system for the
Company's Common Stock.
- ----------------------------------------------------------------
YEARS ENDED MAY 31:
- ----------------------------------------------------------------
1998 1997
HIGH LOW HIGH LOW
- ----------------------------------------------------------------
First Quarter 36 3/8 29 70 1/4 59
Second Quarter 45 19/32 33 7/8 78 1/2 66 3/4
Third Quarter 42 1/2 28 7/8 74 1/2 32 3/4
Fourth Quarter 43 7/8 35 9/16 33 3/8 20 3/4
Year 45 19/32 28 7/8 78 1/2 20 3/4
The Company has not paid any dividends since its initial public offering in
February 1992 and has no current plans to pay any dividends on its Common Stock
and Class A Stock. In addition, certain of the Company's credit facilities
restrict the amount of the payment of dividends. See Note 3 of the Notes to
Consolidated Financial Statements.
The number of holders of record of Class A stock and Common Stock as of August
6, 1998 were three and approximately 7,000, respectively.
10|SCHOLASTIC CORPORATION
ITEM 6 - SELECTED FINANCIAL DATA
YEARS ENDED MAY 31,
(AMOUNTS IN MILLIONS EXCEPT PER SHARE DATA)
- -------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------------
STATEMENT OF INCOME DATA:
Total revenues $1,058.4 $966.3 $928.6 $749.9 $631.6
Cost of goods sold 536.8 530.7 466.0 356.0 297.1
Selling, general and administrative expenses 440.3 399.6 367.4 316.2 271.3
Other operating costs
Goodwill and trademark amortization
and depreciation 21.7 18.3 13.1 10.0 7.6
Impairment of assets 11.4 - 24.3 - -
Operating income 48.2 17.7 57.8 67.7 55.6
Sale of the SOHO Group 10.0 - - - -
Interest expense, net (20.1) (16.7) (11.2) (5.4) (2.9)
Net income 23.6 0.4 31.9 38.6 24.8
Net income per share-basic $1.46 $0.02 $2.02 $2.48 $1.60
Net income per share- diluted $1.45 $0.02 $1.97 $2.38 $1.53
Weighted average shares outstanding-basic 16.2 16.0 15.8 15.6 15.5
Weighted average shares outstanding-diluted 16.4 16.3 16.2 16.2 16.2
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA (END OF YEAR):
Working capital $201.0 $215.7 $177.1 $136.8 $100.3
Total assets 765.3 784.4 673.2 505.9 390.0
Long-term debt 243.5 287.9 186.8 91.5 39.6
Stockholders' equity 318.1 297.5 288.6 250.2 205.8
Certain prior year information has been restated to conform with new accounting pronouncements.
ANNUAL REPORT 1997/1997|11
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Certain prior year comparisons have been restated to conform with the current
year presentation. The following discussion and analysis should be read in
conjunction with the Consolidated Financial Statements and related Notes and
Selected Financial Data.
FISCAL 1998 COMPARED TO FISCAL 1997
Revenues increased approximately 10% from $966.3 million in fiscal 1997 to
$1,058.4 million in fiscal 1998.
Domestic book publishing revenues accounted for the majority of the Company's
revenues in both fiscal 1998 and fiscal 1997. These revenues increased 13% from
$645.9 million in fiscal 1997 to $728.5 million in fiscal 1998. Book club
revenues inclusive of continuity programs accounted for approximately 42% of
domestic book publishing sales. Book club revenues increased approximately 16%
over fiscal 1997 reflecting improved order volume combined with increased
revenue per order. Revenues from book fairs accounted for approximately 23% of
domestic book publishing sales and generated sales growth approximating 15%,
resulting from increases in both the number of fairs held and the average
revenue generated per fair. Revenues related to sales of core and supplemental
instructional materials to schools accounted for 17% of domestic book publishing
revenues, increasing 43% over fiscal 1997 primarily due to the impact of strong
second year sales of the Company's reading program SCHOLASTIC LITERACY PLACE(R).
The Company's trade distribution channel accounted for approximately 12% of
domestic book publishing sales. Net trade sales decreased approximately 15% due
to a continued decline in the sales of the Goosebumps(R) series. Trade sales of
properties other than Goosebumps increased approximately 24% over fiscal 1997.
In fiscal 1998, domestic magazine publishing revenue declined approximately 7%
from $81.3 million to $75.2 million reflecting a decrease in revenues from the
sale of the Company's Small Office Home Office Group ("SOHO Group"), effective
January 1, 1998. Domestic magazine publishing revenues of properties other than
the SOHO Group increased approximately 6% over fiscal 1997 and are comprised
primarily of circulation and advertising revenues.
Domestic media, TV/movie production & licensing revenues declined slightly from
$60.2 million in fiscal 1997 to $58.8 million in fiscal 1998. Increased software
sales were offset by the impact of decreased licensing revenue related to
Goosebumps products.
International revenues increased approximately 10% from $178.9 million in fiscal
1997 to $195.9 million in fiscal 1998. Revenues from the Company's United
Kingdom operation improved approximately 33% reflecting the full year benefit of
the fiscal 1997 acquisition of Red House Books, Ltd. along with continued
strength in the trade distribution channel. Revenues in Australia, Canada and
New Zealand were adversely impacted by weakness in their respective currencies
relative to the U.S. dollar.
Cost of goods sold increased 1% from $530.7 million in fiscal 1997 to $536.8 in
fiscal 1998. Cost of goods sold as a percentage of revenues decreased from 55%
in fiscal 1997 to 51% in fiscal 1998. This decrease as a percentage of sales
resulted primarily from changes in product mix, the benefit of incremental,
high-margin SCHOLASTIC LITERACY PLACE sales, lower rate of returns in the Trade
division and the impact of the Company's cost reduction program. The major
components of cost of goods sold and their respective approximate percentages of
total cost of goods sold in fiscal 1998 were as follows: printing and binding
(36%), paper (14%), postage (11%), royalty expense (9%), prepublication costs
(7%) and editorial expense (7%). These percentages were comparable with the
prior fiscal year. The balance of cost of goods sold includes shipping and
labor, reserves for obsolescence and other manufacturing costs.
Selling, general and administrative expenses increased by 10%, in line with the
percentage increase in sales, from $399.6 million in fiscal 1997 to $440.3
million in fiscal 1998, due primarily to increases in marketing and promotion
costs resulting from increased volume in book clubs and book fairs combined with
increased information technology costs. Selling, general and administrative
expenses as a percentage of revenue were approximately equal to the prior year
at 41.6%. Cost reductions in core and supplemental were offset by increases in
information technology and United Kingdom spending. Marketing and promotion
costs, which include the costs of catalogs, direct mail, book club kits, book
club bonus points and advertising, constituted approximately 56% and 57% of
selling, general and administrative expenses in fiscal 1998 and fiscal 1997,
respectively. The balance of selling, general and administrative expenses is
comprised of facility-related costs, office equipment rentals, salary and
related expenses and consulting fees.
Other operating costs increased from $18.3 million in fiscal 1997 to $33.1
million in fiscal 1998. In the third quarter of fiscal 1998, the Company
incurred a non-cash charge related to the impairment of certain assets of $11.4
million. A significant portion of this charge was determined in accordance with
Statement of Financial Accounting
12|SCHOLASTIC CORPORATION
Standards No. 121 (SFAS 121), "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of."
Operating income increased $30.5 million from $17.7 million in fiscal 1997 (1.8%
of sales) to $48.2 million in fiscal 1998 (4.6% of sales). Excluding the $11.4
million non-cash charge referred to above, fiscal 1998 operating income was 5.6%
of sales.
In fiscal 1998, the results include a pre-tax gain of approximately $10.0
million as a result of the January 1, 1998 sale of its SOHO Group, including
HOME OFFICE COMPUTING(R) magazine, for approximately $19.2 million and the
assumption of certain liabilities.
Net interest expense increased from $16.7 million in fiscal 1997 to $20.1
million in fiscal 1998. This increase was principally attributable to higher
average debt levels in fiscal 1998, partially due to the January 1997
acquisition of Red House Books, Ltd. and a higher weighted-average interest rate
due to the issuance of the Company's 7% Notes due 2003 in December 1996.
Earnings before provision for income taxes increased from $1.0 million in fiscal
1997 to $38.1 million in fiscal 1998.
Income tax expense increased from $0.6 million in fiscal 1997 to $14.5 million
in fiscal 1998. In fiscal 1998 and 1997, the Company's effective tax rates were
38.0% and 64.6% of earnings before taxes, respectively. The decrease in the
effective tax rate is due primarily to a lower relative state and local tax
burden, which is computed on an unconsolidated basis.
Net income increased from $0.4 million in fiscal 1997 to $23.6 million in fiscal
1998. The basic and diluted net income per Class A and Common Share were $1.46
and $1.45, respectively, in fiscal 1998 and $0.02 for both basic and diluted in
fiscal 1997.
FISCAL 1997 COMPARED TO FISCAL 1996
Revenues increased approximately 4% from $928.6 million in fiscal 1996 to $966.3
million in fiscal 1997.
Domestic book publishing revenues accounted for the majority of the Company's
revenues in both fiscal 1997 and fiscal 1996. Domestic book publishing revenues
decreased 2% from $657.5 million in fiscal 1996 to $645.9 million in fiscal
1997. Book clubs, including continuity programs, accounted for approximately 40%
of domestic book publishing sales in fiscal 1997. Book club revenues in fiscal
1997 decreased approximately 4% in comparison to fiscal 1996. The decrease
in book club revenues, due to lower orders and decreased revenue per order, was
only partially offset by the January 1996 purchase of Trumpet Book Clubs, Inc.
Book fairs accounted for approximately 23% of domestic book publishing sales and
generated sales growth of 18%, as a result of an increased number of fairs held
and an increase in the average revenue generated per fair. The Company's trade
distribution channel accounted for 16% of domestic book publishing sales. Net
trade sales decreased approximately $40 million or 30% due primarily to
increases in the rate of returns and a decline in the sales of the Goosebumps(R)
series, particularly beginning in January/February 1997. Also included in
domestic book publishing revenues are sales of core and supplemental
instructional materials to schools. Sales of core and supplemental instructional
materials to schools accounted for approximately 13% of domestic book publishing
revenues and were at approximately the same level as fiscal 1996 as first year
sales of the Company's reading program SCHOLASTIC LITERACY PLACE(R) more than
offset a decrease in sales of the SCHOLASTIC EARLY CHILDHOOD WORKSHOP(TM).
In fiscal 1997, domestic magazine publishing revenue remained at the same level
as in the prior year at approximately $81.0 million. Domestic magazine
publishing revenues are comprised primarily of advertising revenues and
circulation revenues. The Company's SOHO group accounted for 27% of total
domestic magazine publishing revenues in fiscal 1997.
Domestic media, TV/movie productions & licensing revenues increased from $39.8
million in fiscal 1996 to $60.2 million in fiscal 1997. This revenue growth was
due largely to the increased licensing revenue from the sale of Goosebumps
products.
International revenues grew by 19% from $149.7 million in fiscal 1996 to $178.9
million in fiscal 1997. The United Kingdom revenue significantly benefited from
the March 1996 acquisition of School Book Fairs Ltd. and the 1997 acquisition of
Red House Books, Ltd. The United Kingdom and Canada also had increases in trade
sales.
Cost of goods sold increased 14% from $466.0 million in fiscal 1996 to $530.7
million in fiscal 1997. Cost of goods sold as a percentage of revenues increased
from 50% in fiscal 1996 to 55% in fiscal 1997. This increase resulted from a
planned increase in prepublication amortization, restructuring charges,
increases in inventory reserves and the impact of increases in the trade returns
reserves. The major components of cost of goods sold and their respective
approximate percentages of total cost of goods sold in fiscal 1997 were as
follows:
ANNUAL REPORT 1997/1998|13
printing and binding (35%), paper (13%), postage (11%), royalty expense (9%),
editorial expense (8%), and prepublication costs (6%). The balance of cost of
goods sold includes shipping and labor, delivery charges and other manufacturing
costs. As a percentage of total cost of goods sold, printing and binding
increased from 27% in fiscal 1996 due to product mix and the impact of
increasing trade returns reserves, and paper costs decreased from 19% in fiscal
1996, due primarily to changes in product mix and decreases in paper prices.
Selling, general and administrative expenses increased by 9%, from $367.4
million in fiscal 1996 to $399.6 million in fiscal 1997, due primarily to
increased salaries, marketing and promotion costs and the Company's
restructuring charge. Selling, general and administrative expenses as a
percentage of revenue remained at approximately 40%. Marketing and promotion
costs, which include the costs of catalogs, direct mail, book club kits, book
club bonus points and advertising, constituted approximately 57% of selling,
general and administrative expenses in fiscal 1997, approximately the same as in
fiscal 1996. The balance of selling, general and administrative expenses was
comprised of facility-related costs, office equipment rentals, salary and salary
related expenses and the majority of the Company's restructuring charge.
Other operating costs decreased from $37.4 million in fiscal 1996 to $18.3
million in fiscal 1997. In the fourth quarter of fiscal 1996, the Company
incurred a non-cash charge related to the impairment of certain assets of $24.3
million. A significant portion of this charge was determined in connection with
the Company's early adoption of Statement of Financial Accounting Standards No.
121, (SFAS 121) "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of."
Operating income decreased $40.1 million or 69% from $57.8 million in fiscal
1996 (6% of sales) to $17.7 million in fiscal 1997 (2% of sales).
Net interest expense increased from $11.2 million in fiscal 1996 to $16.7
million in fiscal 1997. This increase was principally attributable to higher
debt levels incurred to fund working capital growth, mid-year fiscal 1996
acquisitions of approximately $19.0 million, acquisitions in fiscal 1997
totaling approximately $32.0 million and a higher interest rate in part
resulting from the December 23, 1996 issuance of $125.0 million of 7% Notes due
2003.
Earnings before provision for income taxes decreased from $46.6 million in
fiscal 1996 to $1.0 million in fiscal 1997.
Income tax expense decreased from $14.7 million in fiscal 1996 to $0.6 million
in fiscal 1997. In fiscal 1997 and 1996, the Company's effective tax rates were
64.6% and 31.6% of earnings before taxes, respectively. The increase in the
effective tax rate primarily is due to state and local taxes, which are computed
on an unconsolidated basis.
Net income decreased from $31.9 million in fiscal 1996 to $0.4 million in fiscal
1997. The basic and diluted net income per Class A and Common Share was $0.02 in
each case in fiscal 1997 and $2.02 and $1.97, respectively, in fiscal 1996.
SEASONALITY
The Company's book clubs, book fairs and most of its magazines operate on a
school-year basis, therefore, the Company's business is highly seasonal. As a
consequence, the Company's revenues in the first and third quarters of the
fiscal year are lower than its revenues in the other two fiscal quarters, and
the Company generally experiences a substantial loss from operations in the
first quarter. Typically, book club and book fair revenues are proportionately
larger in the second quarter of the fiscal year, while revenues from the sale of
instructional materials are larger in the first quarter. See Supplementary
Financial Information in Item 8.
For the June through September time period, the Company experiences negative
cash flow due to the seasonality of its business. Historically, as a result of
the Company's business cycle, seasonal borrowings have increased during June,
July and August and generally have peaked in September or October, and have been
at the lowest point in May.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents remained virtually unchanged for fiscal
years 1998, 1997 and 1996. In fiscal 1998, the net cash provided by operating
activities was used to pay down debt and to finance investing activities.
Net cash provided by operating activities in fiscal 1998 was $117.7 million, and
was derived from the net income of the Company adjusted for the add-back of
non-cash charges and the effect of changes in working capital requirements.
Cash outflows for investing activities were $79.2 million for fiscal 1998,
primarily related to royalty advances, business and trademark
acquisition-related payments, capital expenditures, and prepublication and
production costs expenditures.
Payments for royalty advances totaled $29.3 million for fiscal 1998. Business
and trademark acquisition-related payments
14|SHOLASTIC CORPORATION
were $6.0 million for the year, including the April 15, 1998 acquisition of The
Electronic Bookshelf, Inc. The Company's capital expenditures totaled $20.3
million in fiscal 1998. Prepublication cost expenditures totaled $25.4 million,
representing a decrease of $28.9 million from fiscal 1996, largely due to higher
investments by the Company during fiscal 1996 in its core publishing and
technology based activities, primarily in the development of SCHOLASTIC LITERACY
Place(R). The Company does not expect significant increases in investing
activities with the exception of prepublication costs, where it expects a
significant prepublication spending increase during fiscal 1999 over fiscal 1998
largely due to the planned revision to SCHOLASTIC LITERACY PLACE.
The Company believes its existing cash position, combined with funds generated
from operations and funds available under the its credit facilities, will be
sufficient to finance its on-going working capital requirements for the next
fiscal year.
FINANCING
The Company currently maintains two unsecured credit facilities which provide
for aggregate borrowings of up to $170.0 million (with a right, in certain
circumstances, to increase to $195.0 million), including the issuance of up to
$10.0 million in letters of credit. The Company uses these facilities to fund
seasonal cash flow needs and other working capital requirements. At May 31,
1998, the Company had $5.3 million in borrowings were outstanding under these
facilities at a weighted average interest rate of 6.685%.
These two facilities expire May 31, 2000. The Company anticipates extending or
replacing these facilities during fiscal 1999. The Company does not anticipate
any difficulty in negotiating satisfactory credit arrangements.
In addition, unsecured lines of credit available to the Company's United
Kingdom, Canadian and Australian operations totaled $38.3 million at May 31,
1998. These lines are used primarily to fund working capital needs. At May 31,
1998, $9.8 million in borrowings were outstanding under these lines at a
weighted average interest rate of 6.06%.
ACQUISITIONS
In the ordinary course of business, the Company explores domestic and
international expansion opportunities, including potential niche and strategic
acquisitions. As part of this process, the Company engages with interested
parties in discussions concerning possible transactions. The Company will
continue to evaluate such opportunities and prospects. Consistent with this
strategy, the Company acquired The Electronic Bookshelf, Inc. and a number of
small book fair operations during fiscal 1998 for an aggregate amount of
approximately $6.0 million and, in June 1998 acquired certain assets of Pages
Book Fairs, Inc. for approximately $10.5 million.
YEAR 2000 COMPUTER SYSTEM COMPLIANCE
Management has initiated an enterprise-wide program to prepare the Company's
computer systems and applications for the year 2000. The Company expects to
incur internal staff costs, as well as consulting and other expenses related to
infrastructure and facilities enhancements necessary to prepare the systems for
the year 2000. Costs for testing and conversion of system applications will be
expensed as incurred and are estimated at $10.0 million to $12.0 million over
the next two fiscal years, with costs of approximately $8.0 million estimated to
be incurred for fiscal 1999. Such costs do not include normal system upgrades.
To date, the Company has spent approximately $2.0 million. A comprehensive
evaluation of the impact of the Year 2000 issue on both the Company's
infrastructure and its interfaces with suppliers and customers is expected to be
completed during fiscal 1999 including a contingency plan. The Company expects
its remediation program to be completed by August 31, 1999. Based on current
plans and efforts to date, the Company does not expect that the year 2000 issue
will have a material adverse impact on its operations; however, there can be no
assurance that all problems will be foreseen and corrected, or that no material
disruption to the Company's business will occur.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131"), and SFAS No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 131
establishes standards for reporting financial and descriptive information for
reportable segments on the same basis that is used internally for evaluating
segment performance and the allocation of resources to segments. The Company is
evaluating the effect, if any, of SFAS 131 on its operating segment reporting
disclosure. SFAS 130 establishes standards for presenting non-stockholder
related items that are excluded from net income and reported as components of
stockholders' equity, such as foreign currency translation. These statements are
effective for fiscal years beginning after December 15, 1997. The adoption of
these statements will not have a material effect on the Company's results of
operations or financial position.
FACTORS THAT MAY AFFECT FUTURE RESULTS AND
FINANCIAL CONDITION
This Annual Report on Form 10-K contains forward-looking statements. Additional
written and oral forward-looking statements may be made by the Company from time
to time in
ANNUAL REPORT 1997/1998|15
Securities and Exchange Commission ("SEC") filings and otherwise. The Company
cautions readers that results predicted by forward-looking statements,
including, without limitation, those relating to the Company's future business
prospects, revenues, working capital, liquidity, capital needs, interest costs,
and income are subject to certain risks and uncertainties that could cause
actual results to differ materially from those indicated in the forward-looking
statements, due to factors including the following and other risks and factors
identified from time to time in the Company's filings with the SEC:
o The Company's ability to produce successful educational, trade, entertainment
and software products;
o The Company's ability to maintain relationships with its creative talent;
o Changes in purchasing patterns in and the strength of educational, trade,
entertainment and software markets;
o Competition from other educational and trade publishers and media and
entertainment companies;
o Significant changes in the publishing industry, especially relating to the
distribution and sale of books;
o The Company's ability to manage seasonality;
o The effect on the Company of volatility in the price of paper and periodic
increases in postage rates; and
o The general risks attendant to the conduct of business in foreign countries;
and
The foregoing list of factors should not be construed as exhaustive or as any
admission regarding the adequacy of disclosures made by the Company prior to the
date hereof. The Company disclaims any intention or obligation to update or
revise forward-looking statements, whether as a result of new information,
future events or otherwise.
- --------------------------------------------------------------------------------
(Space Intentionally Left Blank)
16|SHOLASTIC CORPORATION
ITEM 8 - CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE:
PAGE(S)
Consolidated Statement of Income for the three years
ended May 31, 1998, 1997 and 1996 19
Consolidated Balance Sheet at May 31, 1998 and 1997 20-21
Consolidated Statement of Changes in Stockholders'
Equity for the three years ended May 31, 1998, 1997 and 1996 22
Consolidated Statement of Cash Flows for the three years
ended May 31, 1998, 1997 and 1996 23
Notes to Consolidated Financial Statements 24-32
Report of Independent Auditors 33
Supplementary Financial Information - Summary of Quarterly
Results of Operations (unaudited) 34
The following consolidated financial statement schedule of the Company is
included in Item 14(d):
PAGE
Schedule II Valuation and Qualifying Accounts and Reserves 44
All other schedules have been omitted since the required information is not
present or is not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the Consolidated
Financial Statements or the Notes thereto.
ANNUAL REPORT 1997/1998|17
(PAGE INTENTIONALLY LEFT BLANK)
18|SCHOLASTIC CORPORATION
CONSOLIDATED STATEMENT OF INCOME
Years ended May 31,
(Amounts in millions except per share data)
- ------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------
Revenues $1,058.4 $966.3 $928.6
Operating costs and expenses:
Cost of goods sold 536.8 530.7 466.0
Selling, general and administrative expenses 440.3 399.6 367.4
Other operating costs:
Depreciation 15.0 12.8 10.0
Goodwill and trademark amortization 6.7 5.5 3.1
Impairment of assets 11.4 -- 24.3
- ------------------------------------------------------------------------------------------------------------------------------
Total operating costs and expenses 1,010.2 948.6 870.8
- ------------------------------------------------------------------------------------------------------------------------------
Operating income 48.2 17.7 57.8
Sale of SOHO Group 10.0 -- --
Interest expense, net (20.1) (16.7) (11.2)
- ------------------------------------------------------------------------------------------------------------------------------
Earnings before taxes 38.1 1.0 46.6
Provision for income taxes 14.5 0.6 14.7
- ------------------------------------------------------------------------------------------------------------------------------
Net income $ 23.6 $ 0.4 $ 31.9
==============================================================================================================================
Net income per Class A and Common Share:
Basic $1.46 $0.02 $2.02
Diluted $1.45 $0.02 $1.97
- --------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES
ANNUAL REPORT 1997/1997|19
CONSOLIDATED BALANCE SHEET
Balances at May 31,
(Amounts in millions except share and per share data)
- ------------------------------------------------------------------------------------------------------------------------------
ASSETS 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
CURRENT ASSETS:
Cash and cash equivalents $ 5.1 $ 4.9
Accounts receivable (less allowance for doubtful accounts of $10.1 in 116.7 100.5
1998 and $7.8 in 1997)
Inventories 199.3 222.0
Deferred taxes 41.8 30.2
Prepaid and other deferred expenses 19.8 38.7
- ------------------------------------------------------------------------------------------------------------------------------
Total current assets 382.7 396.3
- ------------------------------------------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT:
Land 6.4 6.5
Buildings 41.1 41.0
Furniture, fixtures and equipment 79.8 68.4
Leasehold improvements 63.8 61.3
- ------------------------------------------------------------------------------------------------------------------------------
191.1 177.2
Less accumulated depreciation and amortization (54.3) (43.2)
- ------------------------------------------------------------------------------------------------------------------------------
Net property, plant and equipment 136.8 134.0
OTHER ASSETS AND DEFERRED CHARGES:
Prepublication costs 86.3 102.1
Goodwill and trademarks 66.7 67.8
Royalty advances 45.1 43.4
Other 47.7 40.8
- ------------------------------------------------------------------------------------------------------------------------------
Total other assets and deferred charges 245.8 254.1
- ------------------------------------------------------------------------------------------------------------------------------
Total assets $765.3 $784.4
==============================================================================================================================
20|SCHOLASTIC CORPORATION
- ------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES:
Lines of credit $ 9.8 $ 5.0
Current portion of long-term debt 0.3 0.3
Accounts payable 76.9 74.2
Accrued royalties 19.4 12.2
Deferred revenue 10.5 9.0
Other accrued expenses 64.8 79.9
- ------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 181.7 180.6
NONCURRENT LIABILITIES:
Long-term debt 243.5 287.9
Other noncurrent liabilities 22.0 18.4
- ------------------------------------------------------------------------------------------------------------------------------
Total noncurrent liabilities 265.5 306.3
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY:
Preferred Stock, $1.00 par value
Authorized-1,000,000 shares; Issued-None - -
Class A Stock, $.01 par value
Authorized-2,500,000 shares; Issued-828,100 shares 0.0 0.0
Common Stock, $.01 par value
Authorized-25,000,000 shares
Issued-16,741,190 shares (16,671,690 shares at 5/31/97) 0.2 0.2
Additional paid-in capital 205.1 203.8
Foreign currency translation adjustment (5.0) (0.7)
Accumulated earnings 154.6 131.0
Less 1,301,658 shares of Common Stock in treasury, at cost (36.8) (36.8)
- ------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 318.1 297.5
Total liabilities and stockholders' equity $765.3 $784.4
==============================================================================================================================
- --------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES
ANNUAL REPORT 1997/1998|21
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED MAY 31, 1998, 1997 AND 1996
(AMOUNTS IN MILLIONS)
- ------------------------------------------------------------------------------------------------------------------------------------
CLASS A COMMON ADDITIONAL CURRENCY ACCUMULATED TREASURY TOTAL
STOCK STOCK PAID-IN TRANSLATION EARNINGS STOCK STOCKHOLDERS'
CAPITAL ADJUSTMENT EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT JUNE 1, 1995 $0.0 $0.2 $189.6 $(1.5) $ 98.7 $(36.8) $250.2
Net income 31.9 31.9
Translation adjustment 1.3 1.3
Stock options exercised 0.0 2.1 2.1
Tax benefit realized from
stock option transactions 3.0 3.0
Stock granted 0.1 0.1
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT MAY 31, 1996 0.0 0.2 194.8 (0.2) 130.6 (36.8) 288.6
- ------------------------------------------------------------------------------------------------------------------------------------
Net income 0.4 0.4
Translation adjustment (0.5) (0.5)
Stock options exercised 0.0 4.7 4.7
Tax benefit realized from
stock option transactions 4.2 4.2
Stock granted 0.1 0.1
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT MAY 31, 1997 0.0 0.2 203.8 (0.7) 131.0 (36.8) 297.5
- ------------------------------------------------------------------------------------------------------------------------------------
Net income 23.6 23.6
Translation adjustment (4.3) (4.3)
Stock options exercised 0.0 0.7 0.7
Tax benefit realized from
stock option transactions 0.6 0.6
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT MAY 31, 1998 $0.0 $0.2 $205.1 $(5.0) $154.6 $(36.8) $318.1
====================================================================================================================================
22|SCHOLASTIC CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED MAY 31,
(AMOUNTS IN MILLIONS)
- ------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income $23.6 $0.4 $31.9
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization and depreciation 64.9 58.4 42.5
Royalty advances expensed 16.0 15.2 13.5
Provision for losses on accounts receivable 14.6 11.7 9.6
Deferred income taxes (8.4) (7.0) (4.7)
Impairment of assets 11.4 - 24.3
Gain on the sale of the SOHO Group (10.0) - -
Changes in assets and liabilities net of effects from acquisitions and
dispositions:
Accounts receivable (38.9) 7.6 (49.2)
Inventory 14.8 (29.3) (31.6)
Prepaid expenses 17.6 (19.8) 1.5
Accounts payable and other accrued expenses (0.5) 17.3 3.8
Accrued royalties 9.3 (6.9) 5.5
Deferred revenues 3.1 (0.2) (2.7)
Other, net 0.2 (0.7) 8.3
- ------------------------------------------------------------------------------------------------------------------------------
Total adjustments 94.1 46.3 20.8
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 117.7 46.7 52.7
CASH FLOWS USED IN INVESTING ACTIVITIES:
Proceeds received from the sale of the SOHO Group 19.2 - -
Royalty advances (29.3) (33.2) (20.1)
Business and trademark acquisition-related payments (6.0) (32.1) (32.1)
Additions to property, plant and equipment (20.3) (29.5) (30.4)
Prepublication costs (25.4) (26.9) (54.3)
Production costs (13.0) (12.5) (16.9)
Other (4.4) (3.3) (2.7)
- ------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (79.2) (137.5) (156.5)
CASH FLOWS (USED IN) PROVIDED BY FINANCING ACTIVITIES:
Borrowings under loan agreement and revolver 243.9 301.5 209.6
Repayments of loan agreement and revolver (288.3) (326.2) (224.2)
Proceeds from issuance of 7% Notes due 2003 - 123.9 -
Proceeds from issuance of convertible debt - - 107.3
Borrowings under lines of credit 68.6 39.3 53.9
Repayments of lines of credit (63.6) (55.6) (46.7)
Proceeds from exercise of stock options 0.7 4.7 2.1
Tax benefit realized from stock option transactions 0.6 4.2 3.0
Other (0.3) (0.4) (0.8)
- ------------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (38.4) 91.4 104.2
Effect of exchange rate changes on cash 0.1 0.0 0.2
- ------------------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 0.2 0.6 0.6
Cash and cash equivalents at beginning of year 4.9 4.3 3.7
- ------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $5.1 $4.9 $4.3
==============================================================================================================================
SUPPLEMENTAL INFORMATION:
Income taxes paid $17.1 $24.7 $22.3
Interest paid 21.5 13.1 9.8
- --------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES
ANNUAL REPORT 1997/1998|23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS EXCEPT SHARE DATA)
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Scholastic
Corporation and all wholly-owned subsidiaries (the "Company"). All intercompany
transactions are eliminated. Certain prior year amounts have been reclassified
to conform to the current year presentation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial statements and
accompanying notes. Actual results could differ from those estimates and
assumptions. Significant estimates that affect the financial statements include,
but are not limited to, book returns, recoverability of inventory,
recoverability of advances to authors, amortization periods, recoverability of
prepublication costs and litigation reserves.
NATURE OF OPERATIONS
The Company has operations in the United States, the United Kingdom, Canada,
Australia, New Zealand, Mexico, Hong Kong and India and distributes its
materials through a variety of channels, including book clubs, book fairs and
trade. The Company is engaged in one segment of business - the production,
publication and sale of educational materials.
CASH EQUIVALENTS
Cash equivalents consist of short-term investments with original maturities of
less than three months.
INVENTORIES
Inventories are stated at the lower of cost using the first-in, first-out method
or market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are carried at cost. Depreciation and amortization
are provided on the straight-line basis. Buildings have an estimated useful
life, for purposes of depreciation, of forty years. Furniture, fixtures and
equipment are depreciated over periods not exceeding ten years. Leasehold
improvements are amortized over the life of the lease or the life of the assets,
whichever is shorter.
OTHER ASSETS AND DEFERRED CHARGES
Prepublication costs are amortized on the straight-line basis over a two to five
year period commencing with publication.
Royalty advances are expensed as related revenues are earned or when future
recovery appears doubtful.
Goodwill and trademarks acquired by the Company are being amortized on the
straight-line basis over the estimated future periods to be benefited, not
exceeding 40 years.
The Company regularly evaluates the remaining lives and recoverability of the
above costs.
INCOME TAX
The Company provides for income taxes in accordance with Statement of Financial
Accounting Standards No. 109 (SFAS 109), "Accounting for Income Taxes". Under
this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using enacted tax rates and laws that will be in effect when
the differences are expected to enter into the determination of taxable income.
REVENUE RECOGNITION
Sales of books are recognized upon the shipment of product and revenues from
media/television productions and licensing upon achievement of contractual
milestones entitling the Company to payment. Sales made on a returnable basis
are recorded net of provisions for estimated returns and allowances. A reserve
for estimated book returns is established at the time of sale. Actual returns
are charged against the reserve as received.
Revenues from magazine subscriptions are deferred at the time of sale. As
magazines are delivered to subscribers, proportionate amounts of revenue are
recognized.
STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion No. 25,
(APB No. 25) "Accounting for Stock Issued to Employees" in accounting for its
employee stock options. Under APB No. 25, compensation expense is recognized
only when the exercise price of options is below the market price of the
underlying stock on the date of grant. Such expense is recognized ratably over
the vesting period.
EARNINGS PER SHARE
Earnings per share are based on the combined weighted average number of Class A
and Common Shares outstanding using the treasury stock method, in accordance
with the Statement of Financial Accounting Standards No. 128
ANNUAL REPORT 1997/1998|24
(SFAS 128), "Earnings per Share." Potentially dilutive securities are excluded
from the computation of diluted earnings per share for the periods in which they
have an anti-dilutive effect.
RECENT ACCOUNTING PRINCIPLES
Effective February 28, 1998, the Company adopted Statement of Financial
Accounting Standards No. 128 (SFAS 128), "Earnings per Share." This statement
specifies the computation, presentation and disclosure requirements for earnings
per share for entities with publicly held common stock or potential common
stock. Earnings per share amounts for all periods have been restated to conform
with SFAS 128. The calculations of basic and diluted earnings per share are
presented in Note 8.
In June 1997, the Financial Accounting Standards Board issued Statement of
Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive Income". This
statement establishes the standards for the reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. The Company is required to adopt the provisions of SFAS
130 for the first quarter of fiscal 1999.
In June 1997, the Financial Accounting Standards Board issued Statement of
Accounting Standards No. 131 (SFAS 131), "Disclosures About Segments of an
Enterprise and Related Information." This statement requires that public
business enterprises report certain information about operating segments in
financial statements of the enterprise issued to shareholders. It also requires
that public business enterprises report certain information about their products
and services, the geographic areas in which they operate, and their major
customers. The Company is required to adopt the provisions of SFAS 131 for the
fiscal year ended May 31, 1999 and is currently assessing the impact of the
disclosure.
In February 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 132 (SFAS 132), "Employer's Disclosures about
Pensions and Other Post-Retirement Benefits." This statement revises employer's
disclosures about pension and other post-retirement benefit plans. It
standardizes the disclosure requirements for pensions and other post-retirement
benefits, requires additional information on changes in the benefit obligations
and fair values of plan assets that will facilitate financial analysis, and
eliminates certain disclosures required under prior standards. The Company is
required to adopt the provisions of SFAS 132 for the fiscal year ended May 31,
1999.
2 - INTERNATIONAL AND DOMESTIC OPERATIONS
The following table summarizes certain information regarding the Company's
domestic and international operations for the fiscal years ended May 31,
- -------------------------------------------------------------------
INTERNATIONAL OPERATIONS
------------------------
DOMESTIC UNITED OTHER
OPERATIONS KINGDOM INTERNATIONAL CONSOLIDATED
1998
- --------------------------------------------------------------------------------
Revenues $862.5 $90.9 $105.0 $1,058.4
Operating income 42.5 5.2 0.5 48.2
Identifiable assets 633.2 76.8 55.3 765.3
1997
- --------------------------------------------------------------------------------
Revenues $787.4 $68.3 $110.6 $966.3
Operating income 9.4 4.5 3.8 17.7
Identifiable assets 653.4 74.3 56.7 784.4
1996
- --------------------------------------------------------------------------------
Revenues $778.9 $45.6 $104.1 $928.6
Operating income 48.9 3.3 5.6 57.8
Identifiable assets 566.0 46.3 60.9 673.2
International operations consist of the Company's book publishing and
distribution operations in the United Kingdom, Canada, Australia, New Zealand,
Mexico, Hong Kong and India. As of May 31, 1998, 1997 and 1996, equity in the
wholly-owned subsidiaries in these countries was $39.5, $48.2 and $40.8,
respectively.
ANNUAL REPORT 1997/1998|25
3 - DEBT
Long-term debt consisted of the following at May 31,
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
CARRYING *FAIR CARRYING *FAIR
VALUE VALUE VALUE VALUE
- ---------------------------------------------------------------------------------------------------------------------------
Loan agreement and revolver $ 5.3 $ 5.3 $ 49.5 $ 49.5
7% Notes due 2003, net of discount 124.8 127.3 124.7 122.0
Convertible subordinated debentures 110.0 101.4 110.0 89.4
Other debt 3.7 3.7 4.0 4.0
- ---------------------------------------------------------------------------------------------------------------------------
Total debt 243.8 237.7 288.2 264.9
Less current portion (0.3) (0.3) (0.3) (0.3)
- ---------------------------------------------------------------------------------------------------------------------------
Total long-term debt $ 243.5 $ 237.4 $ 287.9 $ 264.6
===========================================================================================================================
* FAIR VALUES ARE ESTIMATED BASED UPON MARKET QUOTES.
- --------------------------------------------------------------------------------
LOAN AGREEMENT
The Company and Scholastic Inc. are joint and several borrowers under a Loan
Agreement (the "Loan Agreement") with certain banks which provides for revolving
credit loans and letters of credit. On April 11, 1995, the Company amended and
restated the Loan Agreement, extending the expiration date to May 31, 2000 and
expanding the facility to $135.0, with a right, in certain circumstances, to
increase it to $160.0. The Loan Agreement was last amended on November 28, 1997.
Interest charged under this facility is either at the prime rate or .325% to
.90% over LIBOR (as defined). There is a commitment fee charged which ranges
from .10% to .3625% on the unused portion. The amounts charged vary based upon
certain financial measurements. The Loan Agreement contains certain financial
covenants related to debt and interest coverage ratios (as defined) and limits
dividends and other distributions.
REVOLVER
On June 19, 1995, the Company and Scholastic Inc., (the "Borrowers") entered
into a Revolving Loan Agreement (the "Revolver") with Sun Bank, N. A., which
provides for revolving credit loans and expires on May 31, 2000. The Revolver
has certain financial covenants related to debt and interest coverage ratios (as
defined) and limits dividends and other distributions. On August 14, 1996, the
Revolver was amended to increase the aggregate principal amount to $35.0 and was
last amended on November 28, 1997.
7% NOTES DUE 2003
On December 23, 1996, the Company issued $125.0 million of 7% Notes due 2003
(the "Notes"). The Notes are unsecured and unsubordinated obligations of the
Company and will mature on December 15, 2003. The Notes are not redeemable prior
to maturity. Interest on the Notes is payable semi-annually on December 15 and
June 15 of each year. The net proceeds (including accrued interest) from the
issuance of the Notes were $123.9 after deducting an underwriting discount and
other related offering costs. The Company utilized the net proceeds primarily to
repay amounts outstanding under the Loan Agreement and the Revolver.
CONVERTIBLE SUBORDINATED DEBENTURES
On August 18, 1995, the Company sold $110.0 of 5.0% Convertible Subordinated
Debentures due August 15, 2005 (the "Debentures") under Regulation S and Rule
144A of the Securities Act of 1933. The Debentures are listed on the Luxembourg
Stock Exchange and the portion sold under Rule 144A is designated for trading in
the Portal system of the National Association of Securities Dealers, Inc.
Interest on the Debentures is payable semi-annually on August 15 and February 15
of each year. The Debentures are redeemable at the option of the Company, in
whole, but not in part, at any time on or after August 15, 1998 at 100% of the
principal amount plus accrued interest. Each debenture is convertible, at the
holder's option any time prior to maturity, into Common Stock of the Company at
a conversion price of $76.86 per share.
OTHER - SHORT TERM LINES OF CREDIT
The Company's international subsidiaries had lines of credit available of $38.3
at May 31, 1998. There were $9.8 and $5.0 outstanding under these credit lines
at May 31, 1998 and 1997, respectively. The weighted average interest rates on
the outstanding amounts were 6.06% and 6.25% at May 31, 1998 and 1997,
respectively.
26|SCHOLASTIC CORPORATION
4 - COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company leases warehouse space, office space and equipment under various
operating leases. Certain of these leases provide for rent increases based on
price-level factors. In most cases management expects that, in the normal course
of business, leases will be renewed or replaced by other leases. The Company has
no significant capitalized leases. Total rent expense relating to the Company's
operating leases was $26.2, $24.4 and $20.5 for the fiscal years ended May 31,
1998, 1997 and 1996, respectively. These rentals include payments under the
terms of the escalation provisions and are net of sublease income.
The aggregate minimum future annual rental commitments at May 31, 1998, under
all non-cancelable operating leases, totaling $150.4, are as follows: 1999 -
$27.2; 2000 - $21.7; 2001 - $17.2; 2002 - $13.6; 2003 - $10.8; later years -
$59.9.
The Company is negotiating an expansion of its corporate headquarters with its
current landlord which would result in higher lease obligations.
CONTINGENCIES
The Company and certain officers have been named as defendants in litigation
which alleges, among other things, violations of Sections 10(b) and 20(a) of the
Securities and Exchange Act of 1934 and rule 10b-5 thereunder, resulting from
purportedly materially false and misleading statements to the investing public
concerning the financial condition of the Company. The litigation is in the
early stages and the Company believes that such litigation is without merit and
plans to vigorously defend against it.
Two subsidiaries of the Company are also defendants and counterclaim plaintiffs
in litigation with Parachute Press, Inc. ("Parachute"), the licensor of certain
publication and non-publication rights to the GOOSEBUMPS(R) series. The action
was commenced by Parachute following repeated notices from the Company to
Parachute of material breaches by Parachute of the agreements under which such
rights are licensed and the exercise by the Company of its contractual remedies
under the agreements.
Parachute alleges that the exercise of such remedies was improper and seeks
declaratory relief and unspecified damages for, among other claims, alleged
breaches of contract, copyright infringement and acts of unfair competition.
Damages sought by Parachute include the payment of a total of approximately
$36.1 of advances over the term of the contract, of which approximately $15.3
had been paid at the time the litigation began.
The Company seeks declaratory relief and damages for, among other claims,
breaches of contract and acts of unfair competition. Damages sought by the
Company include repayment by Parachute of a portion of the $15.3 advance already
paid at the time the litigation began.
The litigation is still in the preliminary stages. The Company has filed a
motion to dismiss and discovery has begun in the matter. The Company believes
that Parachute's claims are without merit. The Company intends to vigorously
defend the lawsuit and pursue its counterclaims. The Company does not believe
that this dispute will have a material adverse effect on its financial
condition.
The Company is also engaged in various legal proceedings incident to its normal
business activities. In the opinion of the Company, none of such proceedings is
material to the consolidated financial position of the Company.
5 - INCOME TAX EXPENSE
Consolidated income before taxes for the fiscal years ended may 31:
- -----------------------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------
Domestic $36.6 ($3.3) $40.6
International wholly-owned
subsidiaries 1.5 4.3 6.0
- -----------------------------------------------------------------
Consolidated income $38.1 $ 1.0 $46.6
=================================================================
Income tax expense (benefit) for the fiscal years ended May 31:
- -----------------------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------
FEDERAL
Current $18.4 $ 1.9 $15.1
Deferred (8.6) (7.6) (5.3)
- -----------------------------------------------------------------
$ 9.8 ($5.7) $ 9.8
=================================================================
STATE AND LOCAL
Current $ 3.0 $ 2.9 $ 1.7
Deferred 0.1 0.6 (0.1)
- -----------------------------------------------------------------
$ 3.1 $ 3.5 $ 1.6
=================================================================
INTERNATIONAL
Current $ 1.5 $ 2.8 $ 2.6
Deferred 0.1 0.0 0.7
- -----------------------------------------------------------------
$ 1.6 $ 2.8 $ 3.3
=================================================================
TOTAL
Current $22.9 $ 7.6 $19.4
Deferred (8.4) (7.0) (4.7)
- -----------------------------------------------------------------
$14.5 $ 0.6 $14.7
=================================================================
ANNUAL REPORT 1997/1998|27
The provisions for income taxes attributable to continuing operations differ
from the amount of tax determined by applying the federal statutory rate as
follows:
- -----------------------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------
Computed federal
statutory provision $13.3 $0.4 $16.3
State income tax provision net
of federal income tax benefit 2.0 2.2 1.0
Difference in effective tax rates on
earnings of foreign subsidiaries (0.9) (0.2) (0.8)
Charitable contributions 0.0 (1.8) (2.0)
Other - net 0.1 0.0 0.2
- -----------------------------------------------------------------
Total provision for income taxes $14.5 $ 0.6 $14.7
=================================================================
Effective tax rates 38.0% 64.6% 31.6%
=================================================================
The undistributed earnings of foreign subsidiaries at May 31, 1998 are $29.9.
Any remittance of foreign earnings would not result in significant additional
tax.
At May 31, 1998, the Company has a charitable deduction carry forward of $7.1
which expires in the fiscal year ending May 31, 2002.
Deferred income taxes reflect tax carry forwards and the net tax effects of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting and the amounts used for income tax purposes as determined
under enacted tax laws and rates. The tax effects of these items that give rise
to deferred tax assets and liabilities at May 31 for the indicated fiscal years
are as follows:
- -------------------------------------------------------------------
1998 1997
- -------------------------------------------------------------------
DEFERRED TAX ASSETS:
Tax uniform capitalization $16.8 $ 2.7
Inventory accounting 11.4 9.9
Other accounting reserves 7.3 7.6
Tax carryforwards 2.5 6.0
Post-retirement, post-employment
and pension obligations 6.3 5.6
Theatrical motion picture accounting 2.4 2.6
Other - net -- 1.5
- -------------------------------------------------------------------
Total deferred tax assets 46.7 35.9
- -------------------------------------------------------------------
DEFERRED TAX LIABILITIES:
Depreciation 2.8 2.3
Other - net 0.7 --
- -------------------------------------------------------------------
Total deferred tax liabilities 3.5 2.3
- -------------------------------------------------------------------
Net deferred tax assets $43.2 $33.6
===================================================================
6 - CAPITAL STOCK AND STOCK OPTIONS
AUTHORIZED SHARES.
The Company has authorized capital stock of 25,000,000 shares of Common Stock,
$.01 par value (the "Common Stock"), 2,500,000 shares of Class A Stock, $.01 par
value (the "Class A Stock"), and 1,000,000 shares of Preferred Stock, $1.00 par
value (the "Preferred Stock"). At May 31, 1998, 15,439,532 shares of Common
Stock, 828,100 shares of Class A Stock and no shares of the Preferred Stock were
issued and outstanding and 1,301,658 shares of common stock were designated as
treasury stock. At May 31, 1998, the Company had reserved 2,631,159 shares of
Common Stock for issuance under its stock option plans, 828,100 shares were
reserved for issuance upon conversion of the Class A Stock, and 1,431,174 shares
were reserved for issuance upon conversion of the Convertible Debentures.
The only voting rights vested in the holders of Common Stock, except as required
by law or may be established by the Board of Directors in favor of any series of
Preferred Stock which may be issued, are the election of such number of
directors as shall equal at least one-fifth of the members of the Board of
Directors. The holders of Class A Stock are entitled to elect all other
directors and to vote on all other matters. Holders of Class A Stock and Common
Stock are entitled to one vote per share on matters on which they are entitled
to vote. The holders of Class A Stock have the right, at their option, to
convert shares of Class A Stock into shares of Common Stock on a share-for-share
basis.
With the exception of voting rights and conversion rights, and as to the rights
of holders of Preferred Stock if issued, the Class A Stock and the Common Stock
are equal in rank and are entitled to dividends and distributions, when and if,
declared by the Board of Directors. The Company has not paid any dividends since
its public offering in 1992 and has no current plans to pay any dividends on its
Common Stock or Class A Stock.
PREFERRED STOCK.
The Company's authorized Preferred Stock may be issued in one or more series
with full or limited voting rights, with the rights of each series to be
determined by the Board of Directors before each issuance. No shares of
Preferred Stock have been issued.
STOCK OPTIONS
On September 21, 1995, the Company adopted the 1995 Stock Option Plan (the
"Stock Option Plan"), which provides for the
28|SCHOLASTIC CORPORATION
grant of nonqualified stock options and incentive stock options. Two million
shares of Common Stock were reserved for issuance upon the exercise of options
granted under this plan. The 1995 Plan supplemented the 1992 Stock Option Plan
(the "1992 Plan"). At May 31, 1998, options on 227,885 shares of Common Stock
remained available for additional awards under the 1995 Plan and no options were
available for grant under the 1992 Plan. At the 1998 Annual Meeting of
Stockholders, the Company will seek the approval of the Class A stockholders to
increase the number of Common Stock shares available for issuance under the 1995
Plan by 1,500,000.
On December 14, 1993, the Company adopted the Non-Employee Director Stock-For-
Retainer Plan (the "Stock-For-Retainer Plan"). During the years ended May 31,
1997 and 1996, the Company issued 1,683 and 1,474 shares of Common Stock at per
share prices of $65.50 and $74.88, respectively, pursuant to the Stock-For-
Retainer Plan. No shares of Common Stock were issued during the year ended May
31, 1998 pursuant to the Stock-For-Retainer Plan. The Stock-For-Retainer Plan
was terminated on September 16, 1997 and the Company adopted a Non-Employee
Director Stock Option Plan (the "1997 Directors' Plan") on September 16, 1997.
The 1997 Directors' Plan provides for the automatic annual grant of options to
purchase shares of the Company's Common Stock to non-employee directors of the
Company. 180,000 shares of Common Stock have been reserved for issuance upon the
exercise of options to be granted under the 1997 Directors' Plan. At May 31,
1998, there were 147,000 options available for grant under the 1997 Directors'
Plan.
Generally, options granted under the various plans may not be exercised for a
minimum of one year after grant and expire ten years and one day after grant.
- --------------------------------------------------------------------------------
Activity under the various stock option plans for the indicated fiscal years
ended May 31 was as follows:
- -------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
--------------------------------- --------------------------------- ----------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
- -------------------------------------------------------------------------------------------------------------------------------
Outstanding-
beginning of year 900,850 $41.94 1,075,400 $29.32 953,729 $17.88
Granted 1,870,560 35.43 218,500 64.23 288,750 57.70
Exercised (69,500) 9.93 (338,175) 13.88 (165,579) 12.87
Cancelled (84,251) 44.12 (54,875) 56.30 (1,500) 34.50
- -------------------------------------------------------------------------------------------------------------------------------
Outstanding-
end of year 2,617,659 $38.42 900,850 $41.94 1,075,400 $29.32
===============================================================================================================================
Exercisable -
end of year 539,651 $36.49 436,363 $25.33 643,250 $14.50
At May 31, 1998, for each of the following classes of options as determined by
range of exercise price, the information regarding such weighted-average
exercise prices and weighted-average remaining contractual lives of each said
class is as follows:
- ------------------------------------------------------------------------------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------------------- -----------------------------------------
WEIGHTED-AVERAGE
WEIGHTED-AVERAGE REMAINING WEIGHTED-AVERAGE
OPTIONS PRICE RANGE NUMBER EXERCISE PRICE CONTRACTED LIFE NUMBER EXERCISABLE EXERCISE PRICE
- ------------------------------------------------------------------------------------------------------------------------------------
$ 9.03 - $14.78 152,000 $ 9.48 2.0 years 152,000 $ 9.48
27.75 - 39.94 2,005,209 35.87 9.0 years 173,200 34.68
6.69 - 68.81 459,950 59.20 7.2 years 213,951 57.37
ANNUAL REPORT 1997/1998|29
The Company adopted SFAS 123 for fiscal 1997. As provided for under the
provisions of SFAS 123, the Company applies APB 25 and related interpretations
in accounting for its stock option plans. In accordance with APB 25, no
compensation expense was recognized because the option price of the Company's
stock options equaled the market price of the underlying stock on the date of
grant.
If the Company had elected to recognize compensation cost based on the fair
value of the options granted at grant date as prescribed by SFAS 123, net income
and earnings per share would have been reduced to the pro forma amounts
indicated in the table below:
- --------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
Net income - as reported $23.6 $ 0.4 $31.9
Net income (loss) - pro forma $14.5 $ (0.8) $31.1
Diluted earnings per share -
as reported $1.45 $ 0.02 $1.97
Diluted earnings (loss)
per share- pro forma $0.89 $(0.05) $1.88
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions:
- --------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
Expected dividend yield 0.00% 0.00% 0.00%
Expected stock price
volatility 0.346 0.184 0.195
Risk-free interest rate 6.02% 6.63% 6.53%
Expected life 5 years 5 years 5 years
The weighted average fair value of options granted during 1998, 1997 and 1996
were $14.64, $20.39 and $18.54 per share, respectively. For purposes of pro
forma disclosure, the estimated fair value of the options is amortized over the
options' vesting period. The pro forma information above is not likely to be
representative of the effects on reported net income for future years as options
are generally granted each year and vest over several years and only include
grants subsequent to June 1, 1995.
7 - EMPLOYEE BENEFIT PLANS
The Company has a defined benefit pension plan (the "US Pension Plan") which
covers the majority of the U.S. employees who meet certain eligibility
requirements. Benefits are based on years of service and on career average
compensation. The US Pension Plan is funded by contributions from participants
and the Company. It is the Company's policy to fund the minimum amount required
by the Employee Retirement Income Security Act of 1974, as amended.
The international subsidiary in the United Kingdom has a defined benefit pension
plan (the "UK Pension Plan") covering those employees meeting minimum length of
service requirements. Benefits are based on years of service and on a percentage
of compensation near retirement. The UK Pension Plan is funded by contributions
from the subsidiary and its employees.
Total defined benefit pension plan costs under the US and UK pension plans for
the indicated fiscal years ended May 31 are summarized as follows:
- --------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
Service cost $ 2.0 $ 1.6 $ 1.4
Interest cost 1.7 1.5 1.2
Actual return on
plan assets (3.0) (3.2) (2.2)
Net amortization 1.2 2.0 1.2
- --------------------------------------------------------------------------------
Total pension cost $ 1.9 $ 1.9 $ 1.6
================================================================================
30|SCHOLASTIC CORPORATION
The funded status of the pension plans at May 31:
- ---------------------------------------------------------------------------------------------------------------------------
ACCUMULATED PLAN ASSETS EXCEED
BENEFITS ACCUMULATED
EXCEED PLAN ASSETS BENEFITS
------------------------------ ------------------
1998 1997 1997
- ---------------------------------------------------------------------------------------------------------------------------
Actuarial present value of benefit obligations:
Vested benefits $22.4 $15.3 $ 2.2
Non-vested benefits 1.1 0.6 --
- ---------------------------------------------------------------------------------------------------------------------------
Accumulated benefit obligation 23.5 15.9 2.2
Effect of projected future salary increases 3.4 2.2 0.6
- ---------------------------------------------------------------------------------------------------------------------------
Projected benefit obligation 26.9 18.1 2.8
Plan assets at fair value 24.1 17.7 2.9
- ---------------------------------------------------------------------------------------------------------------------------
Plan assets less than (greater than) projected benefit obligation 2.8 0.4 (0.1)
Unrecognized net gain 0.7 3.0 0.2
Unrecognized net transition asset (obligation) (0.8) (1.2) 0.2
Unrecognized prior service cost (0.8) (0.9) (0.3)
- ---------------------------------------------------------------------------------------------------------------------------
Accrued pension cost included in financial statements $ 1.9 $ 1.3 $ --
===========================================================================================================================
Assumed rates:
Discount rate 7.0% 8.0% 9.0%
Compensation increase factor 5.0% 5.0% 7.0%
- ---------------------------------------------------------------------------------------------------------------------------
Plan assets consist primarily of stocks, bonds, money market funds and U.S.
government obligations. The assumed weighted-average long-term rate of return on
plan assets for plans with accumulated benefits obligations that exceed their
assets was 9.3% for fiscal 1998 and 9.5% for fiscal 1997 and 1996. Fiscal 1997
included plans with assets in excess of their accumulated benefit obligations,
the weighted average long-term rate of return was 9.0%.
In addition to providing pension benefits, the Company provides certain health
care and life insurance benefits for retired employees. A majority of the
Company's domestic employees may become eligible for these benefits if they
reach normal retirement age while working for the Company.
The components of the net periodic post-retirement benefit costs for the
indicated fiscal years ended May 31 are as follows:
- --------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
Service cost $ 0.4 $ 0.3 $ 0.5
Interest cost on accumulated
benefit obligation 0.8 0.8 0.8
- --------------------------------------------------------------------------------
Net periodic post-retirement
benefit cost $ 1.2 $ 1.1 $ 1.3
================================================================================
The components of the accumulated post-retirement benefit obligation included in
other non-current liabilities at May 31 are as follows:
- --------------------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------------------
Retirees $ 6.4 $ 6.9
Fully eligible active
plan participants 1.4 1.6
Other active plan participants 3.2 2.9
- --------------------------------------------------------------------------------
Accumulated post-retirement
benefit obligation 11.0 11.4
Unrecognized net
actuarial gain 3.1 2.0
- --------------------------------------------------------------------------------
Accrued post-retirement
benefit obligation $14.1 $13.4
================================================================================
The accumulated post-retirement benefit obligation was determined using a
discount rate of 7.0%. Service cost and interest components were determined
using a discount rate of 8.0%. The health care cost trend rate assumed was 10.0%
with an annual decline of 1.0% until the rate reaches 5.0% in the year 2003. An
increase of 1.0% in the health care cost trend rate would result in increases of
approximately $1.4 in the accumulated benefit obligation and $0.2 in the annual
net periodic post-retirement benefit cost.
ANNUAL REPORT 1997/1998|31
The Company also provides other benefit plans including the 401(k) plan. The
expense related to which is not significant to the Company's financial
statements.
8 - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
- --------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
CLASS A AND COMMON SHARES IN MILLIONS
Net Income $23.6 $0.4 $31.9
Weighted average Class A and
Common Shares outstanding
for basic earnings per share 16.2 16.0 15.8
Dilutive effect of employee
stock options 0.2 0.3 0.4
- --------------------------------------------------------------------------------
Adjusted weighted average Class A
and Common Shares for diluted
earnings per share outstanding 16.4 16.3 16.2
================================================================================
Net Income per Class A and
Common Shares
Basic $1.46 $0.02 $2.02
Diluted $1.45 $0.02 $1.97
In 1998, 1997 and 1996, the effect of the 5.0% Convertible Subordinated
Debentures of 1.5, 1.5 and 1.1 million shares respectively on the adjusted
weighted average Class A and Common shares for diluted earnings per share is
anti-dilutive and is not included in the calculation.
9 - RESTRUCTURING COSTS
The Company established certain restructuring reserves in fiscal 1997, resulting
in a pretax charge of approximately $5.0. This charge consisted primarily of
employee severance and relocation costs of $3.3. The balance of this charge of
$1.7 related to the restructuring of the Company's operations including the
closedown of the French operations, productivity improvements at its
distribution facility in Jefferson City, Missouri and the consolidation of
certain of its school publishing operations. At May 31, 1997, other accrued
liabilities include remaining reserves for severance and the closedown of the
French operations of $2.8. At May 31, 1998, $0.2 remained as a reserve for
severance.
10 - IMPAIRMENT OF ASSETS
Fiscal years 1998 and 1996 include non-cash charges relating to the impairment
of certain assets of $11.4 and $24.3, respectively. A significant portion of
these charges was determined in accordance with SFAS 121 and was based on the
Company's assessment of the recoverability of the investments and ongoing cash
flows. These charges consist primarily of unamortized prepublication, $6.9 in
1998 and $10.8 in 1996 and related inventory costs, $4.5 in 1998 and $13.5 in
1996.
11 - DISPOSITION
Effective January 1, 1998, the Company sold its SOHO Group, including Home
Office Computing(R) magazine, for approximately $19.2 and the assumption of
certain liabilities resulting in a pre-tax gain of approximately $10.0.
12 - OTHER FINANCIAL DATA
Goodwill and Trademarks are net of accumulated amortization of $12.0 and $8.2 at
May 31, 1998 and 1997, respectively.
Other assets and deferred charges are net of accumulated amortization of
prepublication costs of $49.8 and $41.8 at May 31, 1998 and 1997 respectively.
Other accrued expenses include a reserve for unredeemed bonus points issued in
conjunction with the Company's book club operations of $11.8 and $8.8, and
accrued taxes of $10.2 and $8.8 at May 31, 1998 and 1997, respectively. Other
accrued expenses in fiscal 1997 also included a reserve for book returns in
excess of the related receivable of $19.0.
32|SCHOLASTIC CORPORATION
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS AND STOCKHOLDERS
SCHOLASTIC CORPORATION
We have audited the accompanying consolidated balance sheet of Scholastic
Corporation (the "Company") as of May 31, 1998 and 1997, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for each of the three years in the period ended May 31, 1998. Our audits
also included the financial statement schedule listed in the Index at Item
14(a). These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company at May 31, 1998 and 1997 and the consolidated results of its operations,
and its cash flows for each of the three years in the period ended May 31, 1998
in conformity with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/Ernst & Young LLP
New York, New York
July 2, 1998
ANNUAL REPORT 1997/1998|33
SUPPLEMENTARY FINANCIAL INFORMATION
SUMMARY OF QUARTERLY RESULTS OF OPERATIONS FOR THE FISCAL YEARS ENDED MAY 31,
(UNAUDITED, AMOUNTS IN MILLIONS EXCEPT PER SHARE DATA)
- ---------------------------------------------------------------------------------------------------------------------------
1998
- ---------------------------------------------------------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER YEAR
- ---------------------------------------------------------------------------------------------------------------------------
Revenues $166.6 $354.8 $239.0 $298.0 $1,058.4
Cost of goods sold 96.1 176.6 121.8 142.3 536.8
Net income (loss) (13.2) 26.0 (3.1) 13.9 23.6
Net income (loss) per share:
Basic $(0.81) $1.61 $(0.19) $0.86 $1.46
Diluted $(0.81) $1.51 $(0.19) $0.83 $1.45
- ---------------------------------------------------------------------------------------------------------------------------
1997
- ---------------------------------------------------------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER YEAR
- ---------------------------------------------------------------------------------------------------------------------------
Revenues $158.6 $342.2 $210.7 $254.8 $966.3
Cost of goods sold 93.7 165.8 118.8 152.4 530.7
Net income (loss) (14.0) 38.5 (12.5) (11.6) 0.4
Net income (loss) per share:
Basic $(0.88) $2.41 $(0.78) $(0.72) $0.02
Diluted $(0.88) $2.21 $(0.78) $(0.72) $0.02
- ---------------------------------------------------------------------------------------------------------------------------
34|SCHOLASTIC CORPORATION
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors is incorporated herein by reference from the
Company's definitive proxy statement to be filed pursuant to Regulation 14A
under the Securities Exchange Act of 1934.
EXECUTIVE OFFICERS (AS OF AUGUST 1, 1998)
NAME AGE POSITION
- ---------------------------------------------------------------------------------------------------------------------------
Richard Robinson 61 Chairman of the Board, President and Chief Executive Officer
Kevin J. McEnery 50 Executive Vice President and Chief Financial Officer
Deborah A. Forte 44 Executive Vice President; Division Head, Scholastic Entertainment Inc.
Barbara A. Marcus 47 Executive Vice President, Children's Book Publishing
Margery W. Mayer 46 Executive Vice President, Learning Ventures
Ruth L. Otte 49 Executive Vice President, Education Group
Hugh Roome 46 Executive Vice President
Richard M. Spaulding 61 Director, Executive Vice President
Charles B. Deull 38 Senior Vice President, Legal and Business Affairs and Secretary
Jean L. Feiwel 45 Senior Vice President, Publisher, Children's Book Publishing
Ernest B. Fleishman 61 Senior Vice President, Education and Corporate Relations
Frank Grohowski 57 Senior Vice President, Operations
Larry V. Holland 39 Senior Vice President, Corporate Human Resources and Employee Services
David J. Walsh 62 Senior Vice President, International Operations
Helen V. Benham 48 Director, Corporate Vice President, Early Childhood Advisor
Claudia H. Cohl 58 Vice President, Editorial Planning and Development, Scholastic Education Group
Raymond Marchuk 47 Vice President, Finance & Investor Relations
David D. Yun 50 President, Scholastic Book Fairs
Karen A. Maloney 41 Vice President and Corporate Controller
Vincent M. Marzano 35 Treasurer
Richard Robinson has served as Chairman of the Board of the Company and/or
Scholastic Inc. since 1982, as Chief Executive Officer since 1975 and as
President since 1974. He has held various executive management and editorial
positions with the Company since joining in 1962, and has been a Director of the
Company since 1971.
Kevin J. McEnery became Executive Vice President and Chief Financial Officer in
1995. Mr. McEnery joined the Company in 1993 as Vice President of Strategic
Planning and Operations of the Magazine and Technology groups. From 1992 through
1993 he was associated with the ITC Group, a telecommunications consulting group
based in Westport, CT as a Senior Consultant. Prior to that he was a Senior Vice
President and Chief Financial Officer of a privately held consumer and
medical products company.
Deborah A. Forte has been with Scholastic since 1984, serving as a Vice
President of Scholastic Entertainment Inc. ("SEI"), formerly Scholastic
Productions, Inc., until 1994 when she was appointed Executive Vice President,
SEI. Ms. Forte was appointed Senior Vice President of the Company; Division
Head, SEI in 1995 and Executive Vice President of the Company; Division Head,
SEI in 1996.
Barbara A. Marcus became Executive Vice President, Children's Book Publishing in
1991. Ms. Marcus joined Scholastic in 1983 as Vice President of Marketing and in
1984 Ms. Marcus was also appointed Associate Publisher.
ANNUAL REPORT 1997/1998|35
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (CONT.)
Margery W. Mayer joined Scholastic in 1990 as Executive Vice President -
Instructional Publishing and was appointed Executive Vice President,
Instructional Publishing, Scholastic School Group in 1997, and Executive Vice
President, Learning Ventures in July 1998. From 1987 until 1990, she was
associated with the Ginn Division of Silver Burdett & Ginn Inc., as General
Manager until 1988 and as President, thereafter.
Ruth L. Otte became Executive Vice President, New Media in 1996 and Executive
Vice President, Education Group in July 1998. From 1986 to 1994 she served as
President and Chief Operating Officer of Discovery Networks and from 1994 until
1995, she was President of Knowledge Adventure.
Hugh Roome joined the Company in 1991 as Vice President and in 1993, he was
appointed to the position of Senior Vice President, Magazine Group. He was
appointed Executive Vice President in 1996. He was Vice President of MCI from
1989 until joining the Company. From 1979 to 1989, Mr. Roome was the Director of
Marketing and Associate Publisher at Newsweek, Inc.
Richard M. Spaulding has served as Executive Vice President of the Company
and/or Scholastic Inc. since 1974. He has held various executive management
positions with the Company since 1960 and has been a Director of the Company
since 1974.
Charles B. Deull joined the Company in 1995 as Senior Vice President, Legal and
Business Affairs. Mr. Deull was associated with the law firm of Cleary,
Gottlieb, Steen and Hamilton from 1986 until joining Scholastic. He was
appointed Secretary in 1997.
Jean L. Feiwel was appointed Senior Vice President, Publisher - Children's Book
Publishing, in 1993 and was appointed Publisher in 1997. Ms. Feiwel joined
Scholastic in 1983 and has served as Vice President, Editor-in-Chief of the Book
Group since 1990.
Ernest B. Fleishman joined Scholastic in 1989 as Senior Vice President,
Education and Corporate Relations. Mr. Fleishman was the Superintendent for the
Greenwich, Connecticut Public School System from 1976 until joining Scholastic
Frank Grohowski was appointed Senior Vice President, Operations of the Company
in 1995. Mr. Grohowski was Vice President of Manufacturing of Scholastic since
1985.
Larry V. Holland joined Scholastic in 1994 as Vice President, Human Resources
and in fiscal 1997 was appointed Vice President, Corporate Human Resources and
Employee Services and Senior Vice President in December 1997. Prior to joining
the Company, Mr. Holland held various positions with MCI since 1990 and left MCI
as Senior Director of Human Resources.
David J. Walsh was elected Senior Vice President in charge of International
Operations for Scholastic in 1983.
Helen V. Benham joined Scholastic in 1974. In 1990 she was named Vice President
and Publisher of the Early Childhood Division and in 1996 was named Corporate
Vice President, Early Childhood Advisor. She became a Director of the Company in
1992.
Claudia H. Cohl has been associated with Scholastic since 1975 and has been a
Vice President of Scholastic for more than five years. She has served in many
capacities, including Editor-in-Chief of Home Office Computing(R).
Raymond Marchuk has been associated with Scholastic since 1983 and has been Vice
President for more than five years. He is currently Vice President of Finance
and Investor Relations.
David D. Yun became President of Scholastic Book Fairs ("SBF") in 1992. Mr. Yun
joined the Company in 1988 as Vice President of Marketing for SBF. In 1990, he
was appointed to the position of Executive Vice President of SBF.
36|SCHOLASTIC CORPORATION
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (CONT.)
Karen A. Maloney was appointed Vice President and Corporate Controller in July
1998. She joined the Company in 1997 as Director of Accounting and Financial
Operations. From 1996 through 1997, she was employed by Calvin Klein as Vice
President, Corporate Controller and subsequently worked as an independent
consultant. From 1995 through 1996, she was employed by Bernard Chaus, Inc. an
apparel company as Vice President, Corporate Controller. From 1990 through 1995,
she was employed by Bidermann Industries Corp., and from 1992 served as Vice
President, Controller.
Vincent M. Marzano has been associated with Scholastic since 1987. He became
Treasurer of the Company in 1993. Previously, he served the Company in many
capacities, including Manager of Planning and Analysis.
There are no family relationships among the directors and executive officers of
the Company, except for Richard Robinson and Helen V. Benham who are Directors
and Executive Officers of the Company and husband and wife.
ITEM 11 - EXECUTIVE COMPENSATION
Incorporated herein by reference from the Company's definitive proxy statement
to be filed pursuant to Regulation 14A under the Securities Exchange Act of
1934.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference from the Company's definitive proxy statement
to be filed pursuant to Regulation 14A under the Securities Exchange Act of
1934.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference from the Company's definitive proxy statement
to be filed pursuant to Regulation 14A under the Securities Exchange Act of
1934.
ANNUAL REPORT 1997/1998|37
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
The following consolidated financial statements are included in Item 8:
Consolidated Statement of Income for the years ended May 31, 1998, 1997
and 1996
Consolidated Balance Sheet at May 31, 1998 and 1997
Consolidated Statement of Changes in Stockholders' Equity for the years
ended May 31, 1998, 1997 and 1996.
Consolidated Statement of Cash Flows for the years ended May 31, 1998,
1997 and 1996.
Notes to Consolidated Financial Statements
(a) (2) Financial Statement Schedule
The following consolidated financial statement schedule is included in Item
14(d):
Schedule II- Valuation and Qualifying Accounts and Reserves
All other schedules have been omitted since the required information is not
present or is not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the Consolidated
Financial Statements or the Notes thereto.
(a)(3) Exhibits:
EXHIBIT NUMBER
3.1 Amended and Restated Certificate of Incorporation of the Company
(incorporated by reference to the Company's Registration Statement
on Form S-8 (Registration No. 33-46338) as filed with the Commission
on March 12, 1992).
3.2 By-Laws of the Company (incorporated by reference to the Company's
Registration Statement on Form S-1 (Registration No. 33-45022) as
filed with the Commission on January 10, 1992 (the "1992
Registration Statement")).
4.1 Amended and Restated Loan Agreement dated April 11, 1995 (the "Loan
Agreement") between the Company and Citibank, N.A., as agent, Marine
Midland Bank, Chase Manhattan Bank, N.A., The First National Bank of
Boston and United Jersey Bank (incorporated by reference to the
Company's Form 10-Q for the quarter ended February 28, 1995 as filed
with the Commission on April 13, 1995), together with Amendment No.
1 to the Loan Agreement dated May 1, 1996 (incorporated by reference
to the Company's Annual Report on Form 10-K as filed with the
Commission on August 28, 1996); Amendment No. 2 to the Loan
Agreement dated May 28, 1997 (incorporated by reference to the
Company's Form 10-Q for the quarter ended August 31, 1997 as filed
with the Commission on October 15, 1997); and Amendment No. 3 to the
Loan Agreement dated November 28, 1997 (incorporated by reference to
the Company's Form 10-Q for the quarter ended November 30, 1997 as
filed with the Commission on January 14, 1998).
4.2* Revolving Loan Agreement dated June 19, 1995 between the Company and
Sun Bank, National Association, as amended August 14, 1996, May 30,
1997, and November 28, 1997.
4.3* Credit Agreement dated June 1, 1992, as amended on October 30, 1995,
between Scholastic Canada Ltd. and CIBC.
38|SCHOLASTIC CORPORATION
4.4* Credit Agreement dated June 24, 1993 between Scholastic Ltd.
(formerly known as Scholastic Publications Ltd.) and Citibank, N.A.
4.5* Credit Agreement dated May 14, 1992, as amended on June 30, 1995,
between Scholastic Ltd. (formerly known as Scholastic Publications
Ltd.) and Midland Bank.
4.6* Credit Agreement dated February 12, 1993, as amended on January 31,
1995, between Scholastic Australia Pty. Ltd. (formerly known as
Ashton Scholastic Pty. Ltd.) and National Australia Bank Ltd.
4.7* Credit Agreement dated April 20, 1993 between Scholastic New Zealand
Ltd. (Formerly Ashton Scholastic Ltd.) and ANZ Banking Group Ltd.
4.8* Credit Agreement dated May 28, 1998 between Scholastic Australia
Pty. Ltd. and HongkongBank of Australia Ltd.
4.9 Indenture dated August 15, 1995 for 5% Convertible Subordinated
Debentures due August 15, 2005 issued by the Company (incorporated
by reference to the Company's Annual Report on Form 10-K as filed
with the Commission on August 28, 1995).
4.10 Indenture dated December 15, 1996 for 7% Notes due December 15, 2003
issued by the Company (incorporated by reference to the Company's
Registration Statement on Form S-3 (Registration No. 333-17365) as
filed with the Commission on December 11, 1996).
10.1** Scholastic Inc. 401(k) Savings and Retirement Plan, as amended and
restated as of June 1, 1992 (incorporated by reference to the
Company's Annual Report on Form 10-K as filed with the Commission on
August 28, 1995).
10.2** Amended and Restated Retirement Income Plan for Employees of
Scholastic Inc. effective as of July 1, 1989 (incorporated by
reference to the Company's Annual Report on Form 10-K as filed with
the Commission on August 28, 1995).
10.3** Scholastic Corporation 1992 Stock Option Plan (incorporated by
reference to the Company's Annual Report on Form 10-K as filed with
the Commission on August 27, 1992).
10.4** Scholastic Corporation 1995 Stock Option Plan (incorporated by
reference to the Company's Registration Statement Form S-8
(Registration No. 33-98186) as filed with the Commission on October
16, 1995).
10.5** Form of Stock Option Agreement for Scholastic Corporation 1995 Stock
Option Plan.
10.6** Scholastic Corporation 1992 Outside Directors' Stock Option Plan
(incorporated by reference to the Company's Annual Report on Form
10-K as filed with the Commission on August 27, 1992).
10.7** Scholastic Corporation 1997 Outside Directors' Stock Option Plan
(incorporated by reference to the Company's Proxy Statement for the
1997 Annual Meeting of Stockholders as filed with the Commission on
August 26, 1997).
10.8** Form of Stock Option Agreement for Scholastic Corporation 1997
Outside Directors' Plan.
10.9** Employment Agreement between Jean L. Feiwel and Scholastic Inc.,
dated April 6, 1998.
10.10**Scholastic Corporation Non-Employee Director Stock-For-Retainer Plan
(incorporated by reference to the Company's Registration Statement
on Form S-8 (Registration No. 33-74064) as filed with the Commission
on January 11, 1994).
ANNUAL REPORT 1997/1998|39
10.11 Lease dated as of January 28, 1992 between Ise Hiyoko, Inc and
Scholastic Inc. (incorporated by reference to Amendment No. 1 to the
1992 Registration Statement as filed with the Commission on February
21, 1992), together with Amendment dated as of April 1, 1993
(incorporated by reference to the Company's Annual Report on Form
10-K as filed with the Commission on August 26, 1994).
10.12 Agreements with Industrial Development Agency of the City of New
York including (i) Lease agreement dated December 1, 1993; (ii)
Indenture of Trust agreement dated December 1, 1993; (iii) Project
Agreement dated December 1, 1993; (iv) Sales Tax letter dated
December 3, 1993 (each of the foregoing are incorporated by
reference to the Company's Annual Report on Form 10-K as filed with
the Commission on August 26, 1994).
21 Subsidiaries of the Company.
23 Consent of Independent Auditors.
27 Financial Data Schedule
(b) Reports on Form 8-K.
No current Report on Form 8-K was filed during the fourth quarter ended May
31, 1998.
- --------------------------------------------------------------------------------
* Such long-term debt does not individually amount to more than 10% of the
total assets of the Company and its subsidiaries on a consolidated basis.
Accordingly, pursuant to Item 601(b)(4)(iii) of Regulation S-K, such
instrument is not filed herewith. The Company hereby agrees to furnish a
copy of any such instrument to the Securities and Exchange Commission upon
request.
** The referenced exhibit is a management contract or compensation plan or
arrangement described in Item 601(b) (10) (iii) of Regulation S-K.
40|SCHOLASTIC CORPORATION
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: August 26, 1998 SCHOLASTIC CORPORATION
By: /s/ Richard Robinson
Richard Robinson, Chairman of
the Board, President and Chief
Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Richard Robinson his or her true and lawful
attorney-in-fact and agent, with power of substitution and resubstitution, for
him or her and in his or her name, place and stead, in any and all capacities,
to sign any and all amendments to this Annual Report on Form 10-K, and to file
the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agent full power and authority to do and perform each and
every act and thing necessary and requisite to be done, as fully and to all the
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent may lawfully do or cause to
be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- -------------------------------------------------------------------------------------------------------------------------
/s/ Richard Robinson Chairman of the Board, President, August 26, 1998
- ----------------------------- Chief Executive Officer and
Richard Robinson Director (Principal Executive Officer)
/s/ Richard M. Spaulding Executive Vice President and Director August 26, 1998
- -----------------------------
Richard M. Spaulding
/s/ Kevin J. McEnery Executive Vice President and Chief August 26, 1998
- ----------------------------- Financial Officer (Principal
Kevin J. McEnery Financial Officer)
/s/ Karen A. Maloney Vice President and Corporate August 26, 1998
- ----------------------------- Controller (Principal Accounting Officer)
Karen A. Maloney
Director August___, 1998
- -----------------------------
Rebeca M. Barrera
/s/ Helen V. Benham Director August 26, 1998
- -----------------------------
Helen V. Benham
/s/ Frederic J. Bischoff Director August 26, 1998
- -----------------------------
Frederic J. Bischoff
/s/ John Brademas Director August 26, 1998
- -----------------------------
John Brademas
/s/ John C. Burton Director August 26, 1998
- -----------------------------
John C. Burton
ANNUAL REPORT 1997/1998|41
SIGNATURE TITLE DATE
- -------------------------------------------------------------------------------------------------------------------------
/s/ Ramon C. Cortines Director August 26, 1998
- -----------------------------
Ramon C. Cortines
/s/ Alonzo A. Crim Director August 26, 1998
- -----------------------------
Alonzo A. Crim
/s/ Charles T. Harris, III Director August 26, 1998
- -----------------------------
Charles T. Harris, III
/s/ Andrew S. Hedden Director August 26, 1998
- -----------------------------
Andrew S. Hedden
Director August __, 1998
- -----------------------------
Mae C. Jemison
/s/ Richard A. Krinsley Director August 26, 1998
- -----------------------------
Richard A. Krinsley
/s/ John G. McDonald Director August 26, 1998
- -----------------------------
John G. McDonald
/s/ Augustus K. Oliver Director August 26, 1998
- -----------------------------
Augustus K. Oliver
42|SCHOLASTIC CORPORATION
SCHOLASTIC CORPORATION
--------------------------
ANNUAL REPORT ON FORM 10-K
YEAR ENDED MAY 31, 1998
ITEM 14(D)
FINANCIAL STATEMENT SCHEDULE
ANNUAL REPORT 1997/1998|43
SCHEDULE II
SCHOLASTIC CORPORATION
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
YEARS ENDED MAY 31, 1998, 1997 AND 1996
(AMOUNTS IN MILLIONS)
- ---------------------------------------------------------------------------------------------------------------------------
ADDITIONS ADDITIONS
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
DESCRIPTION BEGINNING OF YEAR INCOME GOODWILL WRITE OFFS END OF YEAR
- ---------------------------------------------------------------------------------------------------------------------------
MAY 31, 1998:
- ---------------------------------------------------------------------------------------------------------------------------
Reserve for royalty advances $25.1 $ 3.0 $ -- $ -- $28.1
===========================================================================================================================
Reserve for obsolescence $34.0 $15.7 $ (1.0) $18.0 $30.7
Reserve for returns $30.2 $41.8 $ -- $51.5(1) $20.5
MAY 31, 1997
- ---------------------------------------------------------------------------------------------------------------------------
Reserve for royalty advances $24.9 $ 2.3 $ -- $ 2.1 $25.1
===========================================================================================================================
Reserve for obsolescence $27.1 $21.1 $ 2.2 $16.4 $34.0
===========================================================================================================================
Reserve for returns $27.6 $68.7 $ -- $66.1(1) $30.2
===========================================================================================================================
MAY 31, 1996
- ---------------------------------------------------------------------------------------------------------------------------
Reserve for royalty advances $16.6 $ 1.9 $ 6.5 $ 0.1 $24.9
===========================================================================================================================
Reserve for obsolescence $18.2 $11.4 $ 7.5 $10.0 $27.1
===========================================================================================================================
Reserve for returns $19.8 $47.7 $ -- $39.9(1) $27.6
===========================================================================================================================
(1) REPRESENTS ACTUAL RETURNS CHARGED TO RESERVE.
44|SCHOLASTIC CORPORATION
EXHIBIT 21
SCHOLASTIC CORPORATION
SUBSIDIARIES OF THE REGISTRANT
DOMESTIC SUBSIDIARIES STATE OF INCORPORATION
- ---------------------------------------------------------------------------------------------------------------------------
Scholastic Inc. New York
Scholastic Book Fairs, Inc.* New York
Scholastic Book Services, Inc. Delaware
California School Book Fairs, Inc.* California
Arizona School Book Fairs, Inc. Arizona
Scholastic Book Clubs, Inc. Missouri
Scholastic Entertainment Inc.(formerly Scholastic Productions, Inc.) New York
SE Distribution Inc. Delaware
Scholastic UK Group Ltd. (formerly Scholastic Publications (Magazines), Ltd.) Delaware
Read Street Book Fairs, Inc.* Delaware
Trumpet Book Clubs, Inc.** Delaware
Weston Woods Studios, Inc. Delaware
Lectorum Publications, Inc. New York
The Electronic Bookshelf, Inc. Indiana
FOREIGN SUBSIDIARIES JURISDICTION
- ---------------------------------------------------------------------------------------------------------------------------
Scholastic Australia Pty. Ltd. Australia
Bookshelf Publishing Australia Pty. Ltd. Australia
Troll School Book Clubs and Fairs Australia Pty. Ltd. Australia
Scholastic Australia Superannuation Pty. Ltd. Australia
Scholastic Executive Superannuation Pty. Ltd. Australia
Oldmeadow Booksellers (Aust.) Pty. Ltd. Australia
Scholastic (Barbados), Inc. Barbados
Scholastic Canada Ltd. Canada
Scholastic Productions Canada Ltd. Canada
Scholastic Bookfairs Canada Inc. Canada
Scholastic Ltd. England
School Book Fairs Ltd. England
Scholastic Book Clubs Ltd. England
Red House Books Ltd. England
Scholastic Publication Ltd. England
Scholastic Educational Magazines Ltd. England
Red House Book Clubs Ltd. England
Scholastic Hong Kong Limited Hong Kong
School Book Fairs Ltd. Ireland
Scholastic India Private Limited India
Scholastic Mexico, S.A. de C.V. Mexico
Scholastic New Zealand Ltd. (formerly known as Ashton Scholastic Ltd.) New Zealand
* Effective June 1, 1998, Scholastic Book Fairs, Inc., California School Book
Fairs, Inc. and Read Street Book Fairs, Inc. were merged into Scholastic
Inc.
** Effective June 1, 1998, Trumpet Book Clubs, Inc. was merged into Scholastic
Book Clubs, Inc.
ANNUAL REPORT 1997/1998|45
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-48655, No. 33-69058 and No. 33-91090) pertaining to the Scholastic,
Inc. 401(K) Savings and Retirement Plan, in the Registration Statement (Form S-8
No. 33-46338) pertaining to the 1992 Stock Option Plan as of May 19, 1992, in
the Registration Statement (Form S-8 No. 33-50128) pertaining to the Outside
Directors' Stock Option Plan and the Stock Option Agreement with Joseph W.
Oliver, in the Registration Statement (Form S-8 No. 33-74064) pertaining to the
Non-Employee Director Stock-For-Retainer Plan and in the Registration Statement
(Form S-3 No. 333-17365) pertaining to $150,000,000 of Securities of our report
dated July 2, 1998, with respect to the consolidated financial statements and
schedule of Scholastic Corporation included in this Annual Report (Form 10-K)
for the year ended May 31, 1998.
/s/Ernst & Young LLP
New York, New York
August 24, 1998
46|SCHOLASTIC CORPORATION
SCHOLASTIC CORPORATION
FORM 10-K
FOR FISCAL YEAR ENDED MAY 31, 1998
EXHIBIT INDEX
REGULATION S-K EXHIBIT DESCRIPTION OF DOCUMENT PAGE NUMBER IN SEQUENTIALLY
---------------------- ----------------------- ---------------------------
NUMBER NUMBERED COPY
------ -------------
Exhibit 10.5 Form of Stock Option Agreement E-1
for Scholastic Corporation 1995
Stock Option Plan.
Exhibit 10.8 Form of Stock Option Agreement E-4
for Scholastic Corporation 1997
Outside Directors' Stock Option Plan.
Exhibit 10.9 Employment Agreement between Jean E-8
L. Feiwel and Scholastic Inc.,
dated April 6, 1998.
Exhibit 21 Subsidiaries of the E-14
Company.
Exhibit 23 Consent of Ernst & Young E-16
LLP, independent auditors.
Exhibit 27 Financial Data Schedule. E-17
E